Household Income: Rising or Falling?

Last week we read about the Census Bureau’s estimates of household income. The figures showed a slight decline in real median income in the US last year, continuing the trend of the past few years toward lower income.

But others have disputed these findings. The Bush administration continues to cite figures claiming that real incomes have risen since 2000. In fact, it is true that BEA data on personal income does indeed show that it has actually been rising almost continually over this period. In real terms, the BEA data shows that total personal income rose by nearly 1.0% in 2003 and is currently up by about 4.5% since 2000. BLS data on employee compensation also shows a real increase in 2003, of about 1.4%. So which is it? Are households gaining or losing income?

It depends on how you measure it, of course. The biggest single explanation for the discrepancy between these different statistics is the rising cost of health insurance.

The Census survey asks individuals about their take-home pay, but doesn’t ask about the value of the benefits that they receive. The BEA data includes both take-home pay and the value of benefits. It shows that individuals have indeed been receiving greater overall compensation for working, but that the increases in compensation have all been going toward covering health insurance. The chart below breaks up total real compensation into its two components: cash income (i.e. wages and salaries) and benefits.

Source: BEA, NIPA. Series are deflated by CPI, and 2004 figures are extrapolated from the first half of 2004.

The greater compensation that individuals have received lately has all gone into paying for benefits, with the result that households haven’t seen any increase in their cash income in several years. As a result, we get results like the Census data on household income, and individuals don’t feel like they’re gaining any ground since their take-home pay is stagnant. And in fact this raises the legitimate question of whether it is indeed the case that “America’s standard of living is on the rise,” as the White House claims. Are families really enjoying a higher standard of living if the only part of their compensation that’s increasing is the value — but not necessarily the quality or quantity — of health care benefits?

Note that if the increased compensation that individuals have received since 2000 had gone into salaries and wages instead of benefits, then each household in the US would have had approximately $1,500 more in income in 2003 than they actually did. Alas, they never had a chance to touch that extra compensation.

This illustrates the long-term problem raised by Chef Ragout last week in this post about the economic effects of rising health care costs. Put simply, until this country tackles its rapidly-getting-out-of-hand health care problem, expect wages and salaries to lag, and household income to remain depressed.