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Declining living standards? New research finds 164% increase in consumption for low-income Americans from 1960-2015

Summary:
Greg Mankiw recently pointed to an NBER research paper “Fifty Years of Growth in American Consumption, Income, and Wages,” by Bruce Sacerdote, with some really interesting results and findings that run counter to the media narrative of a stagnating/disappearing/struggling middle class in America. Some key excerpts appear below (emphasis mine): The paper’s abstract: Despite the large increase in U.S. income inequality, consumption for families at the 25th and 50th percentiles of income has grown steadily over the time period 1960-2015. The number of cars per household with below median income has doubled since 1980 and the number of bedrooms per household has grown 10% despite decreases in household size. The finding of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator; small biases in any price deflator compound over long periods of time. Using a different deflator such as the Personal Consumption Expenditures index (PCE) yields modest growth in real wages and in median household incomes throughout the time period. Accounting for the Hamilton (1998) and Costa (2001) estimates of CPI bias yields estimated wage growth of 1% per year during 1975-2015.

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Greg Mankiw recently pointed to an NBER research paper “Fifty Years of Growth in American Consumption, Income, and Wages,” by Bruce Sacerdote, with some really interesting results and findings that run counter to the media narrative of a stagnating/disappearing/struggling middle class in America. Some key excerpts appear below (emphasis mine):

The paper’s abstract:

Despite the large increase in U.S. income inequality, consumption for families at the 25th and 50th percentiles of income has grown steadily over the time period 1960-2015. The number of cars per household with below median income has doubled since 1980 and the number of bedrooms per household has grown 10% despite decreases in household size. The finding of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator; small biases in any price deflator compound over long periods of time. Using a different deflator such as the Personal Consumption Expenditures index (PCE) yields modest growth in real wages and in median household incomes throughout the time period. Accounting for the Hamilton (1998) and Costa (2001) estimates of CPI bias yields estimated wage growth of 1% per year during 1975-2015. Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.

From the introduction:

Nearly every week Americans are greeted with headlines such as “Millennials Earn Less Than Their Parents,” “America’s Productivity Climbs But Wages Stagnate,” and “For Most Workers, Real Wages Have Barely Budged For Decades.” The finding of almost no real wage growth since 1975 comes from taking the Bureau of Labor Statistics’ Average Hourly Earnings of Production and Non-Supervisory Workers and using the CPI-Urban to inflate wages to 2015 dollars. Focusing only on these particular price and wage series gives policy makers, citizens and workers an incomplete picture because the choice of price deflator makes a big difference. Most economists believe that the CPI includes upward biases which compound significantly over time. Overstating price growth mechanically implies understating real wage growth.

In the first part of this descriptive paper I consider growth in household consumption for households with below median income. The pessimistic narrative on real wages is somewhat at odds with casual empiricism about material goods consumption. If you spend time working with high school students, you notice that even in low income areas, many of the students have cell phones and have access to cable TV and internet service at home. Access to these powerful and modern tools suggests that low income families have seen important gains in at least some areas of consumption. The quality and variety of home appliances and electronics (TVs) in the average home is surely vastly superior to what people owned in the 1970s. American homes have become more spacious and cars are both higher quality and there are more cars per family.

Measuring consumption formally in the Census, the American Housing Survey and the Consumer Expenditure Survey confirms these casual observations. Among households with below median incomes, the number of cars per household has risen from 1 to 1.6 during 1970-2015. And median square footage in these families’ homes has risen about 8%. Consider consumption measured in 2015 dollars among two person households with below median income. I find a 62% increase in consumption during 1960 to 2015. This calculation uses the CPI and almost surely does not fully include increases in the quality of goods and services. After adjusting CPI for the bias estimated by Hamilton (1998) and Costa (2001), I calculate a 164% increase in consumption for these households.

From the conclusion:

Consumption for below median income families has seen steady progress since 1960. My preferred point estimates are based on CEX measures of consumption where the price index has been de-biased following Hamilton and Costa. These estimates suggest that consumption is up 0.7% per year or 164% over the whole time period. These estimates of growth strike me as consistent with the significant increases in quality and quantity of goods enjoyed by Americans over the last half century. Estimates of slow and steady growth seem more plausible than media headlines which suggest that median American households face declining living standards. 

The post Declining living standards? New research finds 164% increase in consumption for low-income Americans from 1960-2015 appeared first on AEI.

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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