It has become an accepted notion in many circles: The middle class is shrinking, while the rich are reaping the bulk of the spoils in a growing economy.
As proof, proponents of this view point to government data showing that the median household income (adjusted for inflation) fell from $60,002 in 2000 to only $58,476 in 2015.
But in fact, the whole notion of a shrinking middle class is a myth. Here’s why.
When you compare household incomes over time, you have to look at identical households. The census defines a household as one or more persons living in the same abode. Fifty years ago, only 15% of all U.S. households had a single occupant. By 2017 that percentage had nearly doubled, to 28% percent. In just the last 10 years, the percentage has increased by three points. So, the typical household today is much smaller.
Does that matter? Absolutely. In 2017 the median income of a married couple household was $90,386 while the income of a one-person household was a mere $36,000. So you would expect that, as the percentage of single-person households has grown, the average household income would inevitably decline.
Are these single-person households worse off? The millennials who have left their parents’ homes and moved into apartments of their own certainly don’t think so. Nor do retired people who have moved out of their children’s homes and are now living independently. In earlier generations the young and the old couldn’t afford such residential independence, and their ability to do so now is a symptom of financial well-being, not deprivation.
Another factor in the growth of single-person households is that as the economy has improved, rising family incomes have created an opportunity for unhappy couples to establish separate residences. In such cases, even if their combined incomes don’t change, their household incomes decline. For them, divorce was a luxury that they couldn’t have afforded in earlier decades.
There is another flaw in the “shrinking” thesis that merits attention. It suggests that people in the lower income groups remain there because those darn high earners are profiting from all the growth. But that’s not how things work.
Every year the population grows by 2 million to 3 million people. And individuals age, move through the education system, form new households, bear children, and gain work experience. As the life circumstances of household members evolve, households move across the distribution of income, so it isn’t as if people at the low end of the earning scale are stuck there while the rich get richer.
Take the case of an immigrant (legal or otherwise) who takes a first job at the minimum wage. What impact does his job have on the measured median? His low income lowers the median U.S. household income. But that doesn’t mean that others are worse off because he is earning less.
Or what about the college grad who takes a first job at $30,000 and moves into a rented apartment? Her income is way below the median ($61,372), so will bring that measure down. Is anyone worse off?
Or consider the auto executive who retires from his $150,000 job, moves to Florida and lives on his $80,000 pension. Here again, the median income falls, but no one suffers as a result.
Finally, look at these scenarios 10 years later. The immigrant has gained work experience, occupational contacts, improved language skills and maybe even some community college education. Ten years later he is making $38,000 a year, a long way from his minimum-wage beginnings. Other immigrants or youth have replaced him at the bottom of the wage ladder. We still have minimum-wage workers who depress the median, but they aren’t the same workers of 10 years earlier.
That upward mobility is the essence of the American Dream, but it disguises income improvements for individuals that occur even when average incomes are stagnant.
The same is true for the college grad. She starts out with an income that is half of the national median. But she doesn’t stay there. She moves up the income ladder with work experience. In the process, she moves from the low-income class to the middle class. Even if her income doesn’t rise above the national median, she is unquestionably better off.
If everyone is moving up the income ladder, why doesn’t the median income go up? Because millions of new workers enter the labor market every year. Immigrants, the high school dropouts, college grads, newly working moms and others are entering the market every day. Most of these entrants start out at or near the bottom of the income ladder, putting a lid on measured growth of median incomes.
In effect, you have two conflicting statistical forces: the upward pressure on average incomes coming from people moving up the income ladder and the downward pressure of new workers filling the bottom rungs of the income ladder. With a growing population and a dynamic economy, the people inhabiting the middle class changes every year. Even if the median household income never changed, people would still be improving their circumstances.