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The puzzle of real median household income

The graph above shows two often-reported series that look at a measure of income adjusted for inflation and population: real median household income and real per capita GDP. They should be similar, but there are quite a few differences. For example, median household income has stagnated for about two decades while per capita GDP has steadily increased. Let’s try to straighten out this puzzle.

The blue line in the middle graph shows that the number of people in each household has decreased. So the number of households in the nation has increased faster than population, which means that any measure divided by population grows faster than one divided by number of households. To see how much this matters quantitatively, we divide both income concepts by the number of households in the bottom graph. Obviously, they still don’t line up, but at least the gap is smaller. What explains the remainder?

First, the income definitions are different: Household income is based on a survey that asks people about only their income, not their employer-provided benefits and retirement contributions. In a previous post, we showed that these benefits have increased relatively more than wages. Real GDP includes all income in the economy. Second, if the distribution of income becomes more unequal, then the median decreases while the mean stays put. How much each of these contribute to the remaining gap can only be determined with a look at the microdata.

How these graphs were create: Top graph: Search for “real median household income,” click on the series, open the “Edit Graph” panel, then select “Index (scale value to 100 for chosen date)” for units, with 1984-01-01 as the date. Then add a line after searching for “real per capita GDP.” Choose the same units. Middle graph: Search for “civilian population,” open the “Edit Graph” panel, then search for “number of households,” and apply the formula a/b. Bottom graph: Repeat the procedure for the top graph for the first line. For the second line, use the “Add Line” feature, search for “real GDP,” then add the “number of households” series, and apply formula a/b. Finally, choose as units “Index (scale value to 100 for chosen date)” with 1984-01-01 in the bottom field, as the units pertain to the result of the formula.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: A939RX0Q048SBEA, CNP16OV, GDPC1, MEHOINUSA672N, TTLHH

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