Saturday, December 14, 2013

Middle Income Households Becoming Upper Income Households. What's Behind the Shift?

In my December 6, 2013 posting, I looked at household income data compiled by the US Census.  The data clearly shows a long term increase in the number of upper income households, and a decrease in the number of lower and middle income households. What's behind these trends? Are we just working harder or are we working smarter?  It's a bit of a hollow victory if all we're doing is trading more hours for dollars.  So are we just working more?

Working more comes in a couple of flavors—longer work hours or more of us in the workforce.

Maybe we're just working longer hours?  Data from the US Bureau of Labor Statistics actually shows a long-term decline in average work hours.  From 1967 to 2012 (the time frame for the Census' income data) average worker hours dropped from 1860 to 1700 hours per year.

How about an increase in two income households?  Looking at the Workforce Participation Rate (defined as the active workforce divided by the total number of working age Americans) over the 1967 to 2012 time frame does indeed show a net increase.   Since 1967, the WPR (I'll make up an acronym and save myself some typing) has ranged from 60% to 68%, and currently sits at 64%.  Moving from 60% to 64% is not a huge jump, but it’s something.

So how many households are impacted by a higher WPR?

Going back to the Census data, and looking at the end points (1967 and 2012) on the data shows the following distribution:

Percentage of Households in Each Income Group
             <$25k/yr      $25k to $100k/yr       >$100k/yr
1967          28.1%              64.6%                   7.4%
2012          24.7%              53.5%                  22.0%        at current WPR of 64%

Combining the lower and middle income groups into a <$100k/yr bucket results in a distribution that looks like:

Percentage of Households in Each Income Group
              <$100k/yr            >$100k/yr
1967           92.7%                  7.4%
2012           78.2%                 22.0%        at current WPR of 64%

What if 1967’s WPR of 60% was in place in 2012?  Working though the numbers shows a lower WPR would mean the employed workforce shrinks from its current 144 million to 135 million, or a reduction of 9 million jobs.  To make things simple, let's assume these 9 million jobs were all lost in households currently residing in the >$100k/yr group and those job losses pushed all 9 million households out of the upper income group.  (NOTE: this is the worst case scenario to my rising general prosperity argument).

Taking the 9 million households out of the >$100k/yr group and moving them to the <$100k/yr group would change the distribution to look like:

Percentage of Households in Each Income Group
                 <$100k/yr            >$100k/yr
1967            92.7%                   7.4%
2012            85.6%                  14.6%       at the 1967 WPR of 60%

The above scenario applying a 1967 WPR of 60% shows there would still be twice as many higher income households in 2012 vs. 1967 due to rising general prosperity.  As mentioned, the above is a worst case scenario because not all 9 million jobs would result in moving a family from the upper income group to the lower income group—think households where one spouse is an attorney and the other is a school teacher where the school teacher leaving the workforce wouldn’t push that household out of the >$100k/yr group.  There are other scenarios that don't impact the upper income group where a middle income family drops from two to one wage earner.

The long term uptick in dual income households probably explains some of the shift, but something else is at work here.  My explanation, we're working smarter.  Innovation and greater workforce productivity has created better jobs with higher pay resulting in increased prosperity that has lifted many families into the higher income group.

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