Inequality in America – 2000 to 2007

The graph below may look familiar to you.

It shows the commonly reported stagnate median income from 2000 to 2007. The picture looks pretty clear, median income has indeed stopped growing since 2000. Or has it? There are two things I’ve never understood about this argument. The first is that income hasn’t exactly stagnated. It went down by — what would you say? — $1,000 in the mid-2000s only to subsequently rebound. The median income in 2000 and 2007 are roughly equal, but median income did change between the two periods. Second, the stagnation doesn’t look all that exceptional. If you look at the graph you can find lots of two-year periods of various length in which, if you compared income within this period, it would look pretty stagnate and, indeed, would show median income as being equal for the beginning and ending years of the period. But maybe I’m just being pedantic and splitting hairs.

The other interesting piece of information I found is from an article in The American by Steve Conover, who was summarizing his Ph.D dissertation at the University of Texas at Dallas. Conover used US Census data to figure out the percentage change in income using various definitions of the middle class. There is, in fact, no agreed upon definition of what the term actually means. He summarized his findings in the chart below.

Conovoer interprets his results as follows:

Although the recession/recovery during that period resulted in unimpressive aggregate income growth, the observations in the chart above nonetheless contradict conventional wisdom because three of the four chosen definitions of “middle class” outperformed the overall economy. In other words, the middle class got at least its fair share of overall growth, and arguably more. Moreover, all four versions of “middle class” outperformed every definition of “rich”; in short, the gap between the rich and the middle class got smaller, not larger.

This of course was pre-2008 recession, though I’ve heard the rich faired poorly during this time, but have sense recovered. I’ll try to find some data on 2008-2012 income growth and post it later. It seems the chart above may be misleading because, given the other information I’ve found, it is really the top 1% that has enjoyed the most income growth in recent decades. For example:

We have to be careful here because this chart is using different assumptions than Conover’s work. Nevertheless, I think it illustrates the difference between the top 1% and everyone else. It would have been interesting for Conover to add the top 1% to his chart above for comparison, though it may have been a data constraint rather than an omission on his part, I’m not really sure. That said, even as Conover’s chart stands now, I think it would surprise a lot of people and I agree it challenges the conventional wisdom, at least in part.

Turning to yet another source of data, Mark Warshawsky, of the Social Security Advisory Board, claimed in his Congressional testimony that the alleged growth in inequality from 1999 to 2006 can be explained almost entirely because of rising healthcare costs. He points out the difference between earnings and compensation, where compensation includes benefits (such as employeer provided healthcare). While earnings inequality has grown during this period, compensation inequality has not. The reason is that rising healthcare costs affect lower-paid workers more because these costs constitute a larger percentage of their overall compensation; thus rising healthcare cost effectively siphon money away, increasing compensation, but leaving earnings unchanged. Warshawsky recommends attempts to control rising healthcare costs as the best defense against rising inequality.

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