TCS Daily

What Are the 'Dynamics of Economic Well-Being'?

By David R. Henderson - September 13, 2006 12:00 AM

Recently, the Census Bureau reported its findings on 2005 household income for the United States. The August 30 Wall Street Journal's headline for its story on these findings was, "Median Household Income Rises 1.1%." The line underneath (what journalists called "the deck line," which many people read without reading the whole story) stated, "Gap Between the Richest and the Poorest Widens; Middle Class Feels Squeezed."

The article reads as if the reporter, Robert Guy Matthews, had simply read the press releases of the Census Bureau and then called liberal and conservative commentators to get their take. It didn't read as if he had actually downloaded the Census Report and looked at the tables. The New York Times article the same day was headlined "Census Reports Slight Increase in '05 Incomes" and then went on to cite the findings of the sociology department of Queens College that median income was still not as high as its level in 2000. The Times' reporter, Rick Lyman, seems not to have studied the report's findings either.

That's too bad. Because hidden in plain sight in the report are some data that help one understand the household-income picture in the United States. These data show what it takes to be middle class or above. And they show that staying out of, or getting out of, the lowest quintile is not rocket science.

The report's most interesting table -- especially if you've never studied the data -- is Table 3. Throughout the report, U.S. households are categorized by the quintile (fifth) they're in. In 2005, the lowest quintile had incomes of up to $19,178 and the highest quintile had incomes exceeding $91,705. People often picture families at all quintiles looking pretty much alike except for income and ethnicity. But that picture is false.

One of the main ways they are not alike is in the number of people working in the household. In the lowest quintile, 58.7 percent of households had no one earning money, 35.9 percent had one earner, and only 5.5 percent of households had two or more earners. (These percentages total 100.1 percent due to rounding.) In the highest quintile, by contrast, only 2.6 percent had no one earning money, 21.1 percent had one earner, and a whopping 76.3 percent had two or more earners.

In the middle three quintiles -- which, unfortunately, the Census didn't break down further -- only 14.9 percent had no earners and 42.8 percent had two or more earners.

In the lowest quintile, 64.2 percent of the heads of household (the Census now calls them "householders") did not work at all and only 14.0 percent worked full-time year-round. By contrast, in the highest quintile only 11.3 percent of heads of households did not work, while 73.0 percent worked full-time year-round. In the middle three quintiles, 26.3 percent of heads of households did not work and 54.7 percent of heads of households worked full-time year-round.

The message is clear: if you want to have an extremely high probability of avoiding the lowest quintile, get a job, ideally a full-time job, and live with someone who has a job.

That same Census table reveals something else that does not surprise people who study these data, but seems to surprise many others: the correlation between income and age. There's a life cycle to income. Workers, whether high-school dropouts, high-school graduates, or college graduates, tend to start out at a low income, to increase their income with experience, and then to have lower incomes late in their careers or in retirement. And the Census data confirm this. In the lowest quintile, for example, only 25.9 percent of households had a head in the age group from 35 to 54 -- it is within this age range that peak earnings typically occur. In the highest quintile, by contrast, 57.2 percent of heads of household were between the ages of 35 and 54.

And what about marriage? In Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life, Dwight R. Lee and Richard B. McKenzie give as one of their rules, "Get married and stay married." And the Census data confirm those findings. Only 17.9 percent of households in the bottom quintile had a married-couple family; by contrast, 79.0 percent of households in the top quintile had a married-couple family.

One of the misimpressions people often have about those in the lowest income category is that they're there forever. But as the above data show, your characteristics affect the quintile you're in. If you're not old and you want to get out of poverty or even out of the lowest quintile, marry someone who makes money -- and it doesn't have to be a lot of money -- or acquire skills on the job. A section of the Census report titled "Dynamics of Economic Well-Being" reports that if one used just a two-year period to measure poverty, the stated poverty rate would be lower. What this means is that for many poor people, poverty is short-term.

Finally, I shouldn't leave this issue without mentioning two things, neither of which is mentioned in the Census report. The first is that the price index used to adjust incomes for inflation over time -- the Consumer Price Index -- overstates the inflation rate by 0.8 to 0.9 percentage points per year. Over long periods, therefore, economic progress of all income classes is understated.

The second fact is that income and wealth are not the same. To its credit, the Census report never claims that they are. But most commentators write as if they are. When the Wall Street Journal claims that the gap between the richest and the poorest has widened, it is using income as a measure of wealth. But wealth is typically measured by a person's net worth -- the value of his tangible assets minus his debts. Income is the amount of money the person makes or receives annually. People can be high-income but not wealthy if they spend everything they earn; alternatively, they can be low-income but rich if they started to save early and to invest in assets that appreciated. Many of the elderly in this country are in this latter position -- they have low retirement incomes but high net worths. Indeed, one of the striking findings in the popular book The Millionaire Next Door, by Thomas J. Stanley and William D. Danko, is that most of the few million millionaires in the United States have never had particularly high incomes.

So next time you see a report on Census data on household incomes, if you want to know what really happened, download the report and actually peruse the tables.

David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, Calif., is author of The Joy of Freedom: An Economist's Odyssey and co-author of Making Great Decisions in Business and Life (Chicago Park Press, 2006).


TCS Daily Archives