Last week, I spent some time looking at the living standards of the middle class, showing that they have improved notably over time and giving evidence that they are better than or comparable to middle-class lifestyles in other industrialized nations. I will be returning to this issue in a later post in order to address the “two-income trap” argument of Elizabeth Warren, which was raised by Reihan Salam and by Rortybomb.
For now though, I want to talk about the living standards of the poor. It’s important to make the distinction between trends (which I’ll discuss today) and absolute levels of material well-being (which I’ll discuss in a later post) because things can have improved a lot at the same time that they are still not all that great.
Let’s return to the comparison I used in my post on the middle class of “the gold standard” of 1973, when median household income was at its pre-stagflation peak, to 2008. To represent “the poor,” I’ll look at the 20th percentile — the household that is doing better than 20 percent of other households but worse than 80 percent of them. You’ll have to trust me that my research indicates the story would be similar if I were talking about the tenth percentile.
It’s easy to look at only a fairly limited income measure going back to 1973 for the 20th percentile. Doing so indicates that income at the 20th percentile grew from $19,046 to $20,712 (in 2008 dollars, adjusted by the Bureau’s preferred CPI-U-RS). That’s obviously not impressive growth, though it should be noted that the poor are a bit better off today than they were in 1973 (and they look a little better comparing 1973 to 2007, which is a fairer comparison). Using the PCE deflator, which the federal Bureau of Economic Analysis uses (and which I prefer because of the evidence that the CPI-U-RS overstates inflation, particularly among the poor), income increased by about $3,000 after accounting for the cost of living, or 16 percent. That’s about the same as for the middle class using the same measures and methods.
As I noted in the middle-class post, the official income definition is pretty limited. The Census Bureau’s “Definition 14” takes into account taxes, public benefits, and the value of health insurance, and it’s easy to look at going back to 1979 (which was at least as good/bad a year for the poor as 1973 was). By this measure, income at the 20th percentile rose from $17,999 to $24,642 from 1979 to 2008 (using the CPI-U-RS). That’s an increase of over one-third—after adjusting for the cost of living. When the PCE is used to adjust for the cost of living, the increase is almost $8,000—45 percent!
A number of commenters to my post on the middle class didn’t like that the value of health benefits were included in my “comprehensive” income measure. I prefer including them in “income” because employer health care costs have caused earnings growth to be quite a bit lower than it otherwise would have been, and employer- and publicly-provided health insurance contribute to living standards. It is possible that the way the Census Bureau estimates the value of health insurance exaggerates improvements in well-being, but it is not simply the case that rapid health care inflation negates those estimates. Many health economists believe that rising health care costs do reflect corresponding improvements in the quality of care received. At any rate, whether or not you believe I have a dog in this fight, hopefully you believe that the Census Bureau doesn’t.
Nevertheless, we can look at the trend omitting the value of health insurance in 2008. Doing so offers a somewhat conservative estimate of the increase because I can’t omit the value of insurance from 1979. The increase, however, is 21 percent using the CPI-U-RS, and 29 percent using the PCE.
So it seems pretty likely that the living standards of the poor in the U.S. have improved fairly robustly in recent decades. Before leaving behind the question of trends, I should note that there is pretty overwhelming evidence that male workers who don’t get further education beyond high school have seen real wage stagnation (though the story for the median male worker, as I showed in the middle-class posts, is much better). The fact that household incomes at the bottom have grown reflects a decline in taxes paid, an increase in the value of means-tested benefits, and greater work among women (including single women). Computations I have done indicate that confining things to non-elderly households doesn’t affect the story importantly; nor does adjusting incomes for household size.
This issue of greater work among women is one of the last remaining arguments to my case that I feel I need to address more, because it is obviously key to the question of whether higher incomes really reflect improved living standards broadly construed. After all, we could all work more hours and sleep less, which would improve our incomes but not necessarily our quality of life. I’ll take this up in my next couple of posts, but suffice it to say, you can assume my read of the evidence doesn’t overturn the case I’ve been trying to make thus far.
