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Household Incomes And The Declining Middle Class

American Middle Class
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EDITOR'S NOTE: Advisor Perspectives looks at Census Bureau data to show the decline of the middle class over the last 50-plus years. The phenomenon that best illustrates this problem is the “growing gap between the median (middle) and mean (average) household incomes” in America. In 1967, both the median and mean incomes were around $7,000 a year. In 2020, the mean income was $97,206, while the median income was $67,521. This $30,000 difference shows that while the wealthy are pulling the average way up, the “middle class” of America is way below that. The more charts you look at which highlight this trend, the more upsetting it becomes that it seems like the American middle-class dream is dying.

The median household is the statistical center of the Middle Class. In terms of income, this class has not gained much in recent decades. Let's take a closer look at a troubling aspect of the Census Bureau's latest annual household income data, issued in September.

In this update, we'll focus on the growing gap between the median (middle) and mean (average) household incomes across the complete time frame of the Census Bureau's annual reporting, which began in 1967, to the release of the annual data for 2020. Here is a snapshot the clearly illustrates the growing gap between the middle household and the average, which has been increasingly skewed higher by the more rapid income growth of higher income households.

Nominal Median-Mean

Photo: Advisor Perspectives

For a more realistic sense of the median-mean gap, here is the same chart adjusted for inflation based on the Bureau of Labor Statistics' Consumer Price Index-Research Series (which we discuss in more detail here). Among other things, we see that the 2020 average income is just below the all-time highs in both in the median and mean series.

Real Median-Mean

Photo: Advisor Perspectives

The next snapshot features an overlay the two series showing the cumulative growth of the two, which gives a clearer sense of the widening gap. It also documents the erratic trends in real income growth during the 20th century.

Median-Mean Real Growth

Photo: Advisor Perspectives

The next chart is a calculation of the growing gap itself as the percentage spread between the two series. In 1967 the average household received about 12% more annual income than the middle household. In 2020 the spread increased to about 44%.

The Mean Gap

Photo: Advisor Perspectives

The inset in the chart above shows the Gini Index for all households. This is a more sophisticated way to calculate the income distribution of households. We created the inset using the Census Bureau's historical data (see table H-4). Investopedia offers a concise explanation of the Gini Index:

This number, which ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality.

For an explanation of the calculation itself, see the details at Wikipedia. So, take your pick — the growing gap between the median and the mean or the rising Gini Index. Both show the same clear trend in growing inequity in household incomes.

Median and Mean Household Incomes by Age Groups

If we take a closer look at incomes in 1967, grouped by the age of the head of household, the mean-median spread was small for youngest households and increased incrementally with the cohort age to a rather wide spread for the seniors, age 65 and over, namely those born in 1902 and before.

1967 Table

Photo: Advisor Perspectives

Here is the comparable column chart for the latest year of Census Bureau data. The spreads have grown substantially.

2015 Table

Photo: Advisor Perspectives

To facilitate our comparison of the extreme change from 1967 to 2020, this pair of column charts shows us the size of the mean-median spreads for the age cohorts.

Comps Table

Photo: Advisor Perspectives

We'll close this update with a look at the mean skew for a household in the age 45-54 cohort, the peak earning years for our 10-year cohorts.

Mean Skew for Peak Earners

Photo: Advisor Perspectives

We see that the spread remained relatively constant from 1967 through the mid-1980s. But a major change began in 1987 as the policies and politics of supply-side economics (aka Reaganomics) began to take hold.

The median household is the statistical center of the Middle Class. As the charts above clearly illustrate, this class has not gained much in recent decades, and the resulting anger had a major impact on the Republican party and the 2016 Presidential election. It remains to be seen if the policies will truly benefit and positively affect this group in the coming years.

Originally posted on Advisor Perspectives.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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