Real Household Incomes: How Goes the Recovery?

Doug Short has written a great article on median U.S. household income through time.  He shows that the median household income in the U.S., adjusted for inflation, has fallen by 7.2% since 2000 and is 7.9% below the peak reached near the start of 2008, as we entered the last recession.  How do we reconcile this with the notion of an economic recovery?

The median household income, currently at $52,000, is the level at which 50% of households in the country make more and 50% make less.  One possible explanation of the stagnation of incomes is simply that the economic growth since 2000 has accrued disproportionately to the higher-earning households.  This does not appear to be the case, however.  As Short shows in a related piece, income stagnation since 2000 is apparent across the economic spectrum.  The decline in real income in the median households has not corresponded to an increase in the top 5% of households.

Even as corporate earnings look solid and GDP is growing again (albeit slowly), why are household incomes not reflecting the apparent recovery in corporate earnings?

Factor 1: Unemployment

Part of the reason that household incomes are below their peak is the relative supply and demand for labor.  Unemployment remains stubbornly high at 7.4%, but the real percentage of Americans who are either unemployed, are working part-time because they can’t find full-time work, or have other temporary work arrangements is almost twice that number (see table below).

FRED 1

Source: FRED

When there are more people seeking work, wages tend to decline because people are willing to work for less and employers can pick and choose.

Factor 2: Aging workforce

Another explanation for falling real incomes is simply the aging population.  As people retire, their incomes fall, and we are seeing a sustained decline in labor participation rates that is largely due to the aging workforce.  In 2000, people aged 65 and over represented 12.9% of the U.S. population.  By 2030, people 65 and older will make up 19% of the population.

FRED 2Analysis across a range of countries suggests that an aging population presages slow economic growth.  This is a natural consequence of having an increasing portion of the population shifting from working to retirement.  As incomes decline, so does spending, which in turn limits economic growth which then puts downward pressure on wages.

Factor 3: Low quality of jobs being created

One of the most shocking statistics with regard to the economic recovery is that more than 48% of recent college graduates who are employed are working in a job that does not require a college degree.  The numbers are dramatically better for graduates with Science, Technology, Engineering, or Math (STEM) degrees, but are still surprisingly low.  Only 75% of employed graduates in STEM disciplines are working in jobs that require a college degree.  A large number of people who are finding employment are not ending up in higher-paying professional roles, but are working in lower-paying retail and hospitality jobs.  One third of employed people who graduated college in 2011 and 2012 are earning $25,000 or less.

Even in the apparently good news that Motorola is building its new Moto X smart phone in the U.S. there is a downer as far as the prospects for workers.  Jobs assembling and testing this device pay as little as $9 per hour.

Recovery for Business but not for Households?

At the same time that companies seem to have recovered strongly from the recession, U.S. households have seen their incomes stagnate.  Declining household incomes are a result of a number of factors, however, besides the downward pressure on wages that result from a sustained high unemployment rate.  A survey of the current economic landscape does not provide much hope that household incomes will trend upwards anytime soon, either.  The relatively slow improvement in the employment numbers is offset by the relatively low quality of many of the jobs being created.

Longer-term, how can U.S. companies thrive if household incomes are stagnant or falling?  This is a questions for which I have seen little analysis but represents the major challenge to a long-term economic recovery in the U.S.

What to Do?

There are several things that people can do to cope with the anemic growth in incomes in the current economy.  First, as a higher fraction of corporate earnings accrues to shareholders rather than workers, it is increasingly important that households own equity, an ownership stake.  This means investing more in either the stock market or in your own business.  Second, with slow gains in incomes, a wide array of assets will tend to look relatively cheaper over time.  With slowing income growth, we will likely see lower inflation in prices of the goods that households purchase.  The best response to the current economic environment is to save more and to invest efficiently.

The most effective defense in the current economy, as the data cited above suggest, is to build and maintain high-value skills and then to use these skills to generate meaningful sources of value.  The enormous gap in employment between all college graduates and those in STEM fields, for example shows that young people can raise their odds of success by developing skills that are in high demand.  This is not to suggest that everyone needs to study a STEM discipline, however.  Part of the downward pressure in wages is simply that labor is becoming a global commodity.  People with hard-to-find skill sets are harder to replace at lower cost.

Related Links:

Folio Investing The brokerage with a better way. Securities products and services offered through FOLIOfn Investments, Inc. Member FINRA/SIPC.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s