Tuesday, August 26, 2008

Household Income Gains—The Bad News

With the economy in a tailspin, the Census Bureau reported in a news conference this morning that median household income in 2007 had grown over the past year. What a surprise. The $50,233 median of 2007 was 1 percent greater than the $49,568 median of 2006, after adjusting for inflation. This is good news, right?

Wrong. A look at the factors that are driving median household income reveals more bad news than good. The only reason for the increase in the overall median is the rise in the incomes of householders aged 55 to 64. Between 2006 and 2007, this age group was the only one to experience a statistically significant increase in median household income (up 2.2 percent, after adjusting for inflation).

A longer view provides a better understanding of the dynamics at work. Take a look at household income trends by age since 2000:

Percent change in median household income, 2000 to 2007 (in 2007 dollars):

Total households -0.6
Under age 25 -5.2
Aged 25 to 34 -4.6
Aged 35 to 44 -4.0
Aged 45 to 54 -5.7
Aged 55 to 64 +6.3
Aged 65 or older +1.8

Note that householders aged 55 or older are the only ones who made any gains since 2000. Householders aged 55 to 64, in particular, experienced the biggest increase in income between 2000 and 2007. During those seven years, the number of households in the age group increased by an enormous 42 percent as it filled with baby boomers, boosting the share of households headed by 55-to-64-year-olds from 13 to 17 percent. The growing share of householders in the age group, coupled with their rising incomes, explains why overall median household income increased between 2006 and 2007 and fell by just 0.6 percent between 2000 and 2007.

What accounts for the rising incomes of 55-to-64-year-olds? In a word, work. Between 2000 and 2007, the labor force participation rate of men aged 55 to 64 climbed by 2.3 percentage points, to 69.6 percent, as boomer men postponed retirement. The labor force participation rate of women aged 55 to 64 climbed by an even larger 6.4 percentage points, to 58.3 percent, as the working women of the baby-boom generation filled the age group. Without the increasing labor force participation of 55-to-64-year-olds, their household incomes would not have grown, nor would the nation's median household income.

The rise in overall median household income between 2006 and 2007 may look like good news, but looks can be deceiving. In fact, most of the nation's households are losing ground.

Source: Census Bureau

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