In Da Household

April 9, 2010

Posted by Jay Livingston

In my classes about inequality, I often use income data, and I don’t usually think too much about what “income” is. Much of the data is on “household income.” “Median household income” presumably reflects the economic well-being of the typical person in that category. It’s often used to compare different groups or regions or trends over time. In the last Presidential campaign, Democrats often pointed out that in the Bush years while the rich had gotten much richer, real median household income had fallen.

Since then, the economy has gotten worse. But it’s possible that household income may rise. The problem is in the denominator of the fraction.

Imagine two siblings, each with a home, each with an income of $100,000. So their average personal income and their average household income are both $100,000 Suppose that one of them loses his job, his house is foreclosed, and he moves in with his sister’s family. Eventually he finds a job paying $50,000 – not enough for him to move out.

Their average personal income in this family has decreased – it’s now $75,000. But since they now have only one household, their average household income has increased to $150,000.

I don’t know how economists deal with this sort of thing. Surely they must have some way of adjusting for it so that we have a fuller picture of what’s happening with the typical American. And one of the things that is happening is that people are doubling up in their houses.

The number of households is shrinking. Many owners who lose their homes are not moving to rentals. Despite the three million foreclosures, rental vacancy rates – nearly 11% – are higher than they’ve been in at least 50 years. Instead, people are moving in with someone else. The number of people per household is increasing.

The trend started in the latter part of the Bush era. Between 2005 and 2008, 1.2 million households disappeared (study commissioned by the Mortgage Bankers Association reported at CNN). So the decline in household income was even worse than the Democrats were making it out to be. In 2009, the trend has no doubt continued.

It’s something to keep in mind when we look at data on household incomes.

1 comment:

Anonymous said...

Great point - especially when income and household structure are changing at the same time, which we know is happening now. They should report household income per capita, or even better use an income equivalency scale like this: (Adults + .7*kids)^.65

(Number of adults plus seven-tenths of each kid, to the .65 power to adjust for economies of scale - assuming they share expenses.)