US Household Income Growth

by Income Bracket

How is the distribution of US household income growth different from other developed countries?

See the chart below for the answer.

What does this mean? 

Here's how I believe the above chart was produced. They measured household income in 1976 for every household in the US and summed up the figures. They then measured the same quantity in 2007 and adjusted it for inflation. Next, they calculated the difference between these two quantities and called it "income growth" across all households. Finally, they asked, how much of this income growth belongs to households in the bottom 90% of income, to households in the next 9%, and finally to those in the top 1%? The answer is what got plotted in the chart. 

The chart shows that in the US, about 20% of income growth in 1976-2007 belongs to households in the bottom 90% of income. (To understand what this means, the number 20% should be replaced with "small" while the number 90% should be replaced with "large".) At the other extreme, in Denmark, about 90% of income growth belongs to households in the bottom 90% bracket.

The flip side would be to compare income growth belonging to the top 1% bracket and the next 9% bracket ... The chart speaks for itself. The top 1% of households by income captured more than 40% of income growth while the next 9% captured almost 40% of income growth.

To put it in words, income growth in the US has predominantly gone to the top 10% of households. It has been narrowly distributed; actually, more narrowly distributed than in any of the other countries in the above chart. The country where income growth has benefited the largest percentage of households is Denmark.

In a nutshell, the chart presents countries in sorted order where the ordering starts with the country where income growth has benefited the largest percentage of households (Denmark) and ends with the country where income growth has benefited the smallest percentage of households (US).

What is the next chart about?

The chart below shows real median household income in the US by year. We can see that real median household income in 2013 was about $52,000 versus about $47,000 in 1985. This is an increase of 10.6% over 28 years and represents a small increase. 

The reason it represents a small increase is because when this 10.6% is annualized, it corresponds to a 0.36% compounded annual growth rate. This is a real growth rate, i.e. it has been adjusted for inflation. What it says is that the median household income has essentially been flat over the 28 years ending in 2013.

"Median" household income is that level of income such that half of households have a lower income than the median while the other half have a higher income. It represents a convenient (and meaningful) way to talk about a single, representative household in any society where household income happens to be distributed across a wide spectrum.

The above charts were excerpted from an article that appeared on ft.com on July 24, 2015 and was entitled "US income inequality rises up political agenda".

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Sanity check: 

I wonder why the first chart leaves out Germany and Italy which are major European countries. Also missing is Japan even though it represents one of the top economies of the world. 

Second, it would have been interesting if that chart has also included some of the countries from emerging markets such as China, India, Russia, and Brazil. I will venture to guess that there, income growth is even more narrowly distributed than the US ... 

Third, notice that the bottom 5 countries on the first chart are all English speaking countries.

The second chart actually shows that US real median household income has been falling since 1999 (except for a brief rise in 2005-2007)! The more nuanced way to interpret the second chart would be to notice that median household income has grown in waves: The first wave was from 1985-1995 during which US real median household income grew. The second wave was from 1995-2005 during which it grew again and this time much more than the previous time. The third wave was from 2005 onward during which it has not grown but fallen!

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