Income inequality is often cited as a measure of economic health and even social progress. During the recent Presidential campaign, much attention was focused on the argument that the rich are getting richer, the poor are becoming poorer, and the middle class is disappearing. For example, the fact that there was a slight decline in median income over the past several years was lamented in many speeches, articles, and other venues.
However, on an inflation-adjusted basis, median household income has grown from $33,338 per year in 1967 to $43,318 in 2003. While the 2003 level is down from the near $45,000 experienced in 1999 and 2000, the degree of movement is nothing to be alarmed about by historical standards. Fluctuations such as that experienced in the past three years are typical of the changes in median income seen during business cycle downturns. As the economy continues to gain momentum and the pace of job creation picks up, household incomes can be expected to rise as well.
As far as whether the rich are getting richer and the poor poorer, it is helpful to look at the demographic characteristics of each group. The poorest Americans (bottom 20% of households as measured by income) tend to be persons living alone. In fact, some 19% of them are men living alone, and 37% are females living alone. Only 19% are married-couple families. Almost 39% of these householders are over 65 years old, and approximately 24% are over 75. Moreover, only 12% of householders in this group worked at full-time jobs all of last year, and some 60% of households had no one earning an income at all.
For the low to middle ranges of income, these patterns begin to change, with a notably higher percentage of households comprised of married couples. Few are retirement age, and most include one full-time earner. Looking at the higher income groups, the household composition tends to be dominantly married couples. Ages are concentrated in the prime working years of the 30s, 40s, and 50s.
A majority of upper income households included two earners working full time last year. Almost 77% of the highest income households were two-income families. A significant number of the highest group (14%) actually had three people working full time, and 7% had four. This is in sharp contrast to the much smaller participation rates at lower income levels.
Looking at typical income levels for households at varying points in the life cycle (young, prime working life, and retired) reveals a pattern completely in sync with what would be expected. More people ages 15 to 24 fall into the lowest income group than any other income category. College students and those just entering the workforce would be included in this group. In addition, a number of individuals in this age range are still single. For the 30s, 40s, and 50s, the top income quintile represents the largest concentration of households. However, at age 65 and over, the highest concentration of persons fits within the lowest fifth. Given typical retirement patterns, this is certainly not surprising.
Although not directly reflected in income data, a discussion of relative household income levels would be incomplete without mention of productivity. It is economically rational and desirable to pay the more productive persons in a society higher wages in order to improve overall standards of living. For example, because physicians typically have high incomes, more people are encouraged to undergo the rigors of medical school and training. Any occupation in high demand will typically see rising wages, thus leading more individuals to enter that field.
The ambitions, training, skills, and other characteristics of individuals vary tremendously. Income levels also cannot reflect the differing goals and lifestyle choices made. Moreover, they are often a poor indicator of wealth, quality of life, and sustainability. While it is certainly not desirable to see increasing poverty, income differentials in and of themselves are not a social problem. They are a necessary mechanism of a properly functioning economy, part of the natural signaling system of the market. It is only when they are indicative of external impediments to success and upward mobility that they become a source of enormous concern. Variations resulting from free choice about education, level of effort, and career path are the essence of an open culture offering diverse opportunities.
The bottom line is that income levels are just one measure of the health of an economy. They only consider one component of household financial health, ignoring wealth and some types of in-kind benefits, for example. In addition, they cannot reflect individual variation in ambition, skill, or myriad other factors. The recent uproar over income inequality certainly has some legitimacy and validity, but, like so many other things in a brutal campaign season, it was more about politics than economics.