December 9, 2015

The American Middle Class Is Losing Ground

Methodology

Data Sources

The demographic and income data in this report are derived from the Current Population Survey, Annual Social and Economic Supplements (ASEC), which is conducted in March of every year. The specific files used in this report are from March 1971 to March 2015. Conducted jointly by the U.S. Census Bureau and the Bureau of Labor Statistics, the CPS is a monthly survey of approximately 55,000 households and is the source of the nation’s official statistics on unemployment. The ASEC survey in March typically features a larger sample size. Data on income and poverty from the ASEC survey serve as the basis for the well-known Census Bureau report on income and poverty in the United States.52 The ASEC surveys collect data on the income of a household in the preceding calendar year. Thus, the 1971 to 2015 files used in this report contain data on income from 1970 to 2014.

The 2015 ASEC utilized a redesigned set of income questions, so the household income figures reported for calendar year 2014 may not be fully comparable to earlier years. The 2014 ASEC tested the new redesigned income questions by offering five-eighths of the sample the traditional income questions and three-eighths of the sample the redesigned questions. Median household income for calendar year 2013 was $53,585 (in 2013 dollars) based on the redesigned income questions compared with an estimated $51,939 using the traditional income questions. The difference reflects both the different questionnaire and the different sampled households responding to the questionnaires.

Methodological revisions in the CPS may also have an impact on the trends in household income. In particular, the 1993 revisions have an impact on the comparability of income data before and after that date.53

The CPS microdata used in this report are the Integrated Public Use Microdata Series (IPUMS) provided by the University of Minnesota. The IPUMS assigns uniform codes, to the extent possible, to data collected in the CPS over the years. More information about the IPUMS, including variable definition and sampling error, is available at http://cps.ipums.org/cps/documentation.shtml.

The wealth analysis is based on the Survey of Consumer Finances (SCF) that is sponsored by the Federal Reserve Board of Governors and the Department of Treasury. It has been conducted every three years since 1983 and is designed to provide detailed information on the finances of U.S. families. The SCF sample typically consists of approximately 4,500 families, but the 2013 survey included about 6,000 families. Unlike the CPS, the sampling unit in the SCF is the “primary economic unit” (PEU), not the household. As stated by the Federal Reserve Board, “the PEU is intended to be the economically dominant single person or couple (whether married or living together as partners) and all other persons in the household who are financially interdependent with that economically dominant person or couple.”

There are notable differences between the SCF data the Federal Reserve Board releases for public use and the data it uses to publish estimates of family income and wealth. One difference is that estimates published by the Federal Reserve Board are often based on preliminary data, while the public-use files represent edited versions of the data. Also, prior to public release, the Federal Reserve Board alters the data using statistical procedures that may affect the estimates, albeit not significantly. That is done for reasons of confidentiality.

Income and wealth

Household income is the sum of incomes earned by all members of the household in the calendar year preceding the date of the survey. The CPS collects data on money income received (exclusive of certain money receipts, such as capital gains) before payments for such things as personal income taxes, Social Security, union dues and Medicare deductions. Non-cash transfers, such as food stamps, health benefits, subsidized housing and energy assistance, are not included. More detail on the definition of income in the CPS is available in the documentation of the data. It should be noted that income data in the CPS public-use microdata files are top-coded to prevent the identification of a few individuals who might report very high levels of income.

Wealth, or net worth, is the difference between the value of assets owned by households and the value of the liabilities (or debt) held by the household. Assets include items such as the value of an owned home, value of a business, accounts in financial institutions, stocks and bonds, 401(k) and thrift accounts, individual retirement accounts and Keogh accounts, rental properties, motor vehicles and other personal property. Liabilities include home mortgages, credit card debt, student loans, vehicle loans and business debt. The SCF does not account for the discounted values of Social Security benefits or defined benefit pension plans.

The data on income and wealth are adjusted for inflation with the Consumer Price Index Research Series (CPI-U-RS) of the Bureau of Labor Statistics (BLS) as published in the Census Bureau’s income and poverty report. This is the price index series used by the U.S. Census Bureau to deflate the data it publishes on household income. Since 1978, this is the CPI-U-RS index as published by the BLS. For years prior to 1978, the Census Bureau made its own adjustment to the CPI-U to approximate the trend in the CPI-U-RS.

The choice of a price index does not affect the allocation of households into lower-, middle- or upper-income categories at a point in time. That is because the same price index applies to the incomes of all households and does not affect their income-based rank. However, the choice of a price index does affect measures of absolute progress over time. For example, from 1970 to 2014, the price level rose either 510% (CPI-U) or 444% (CPI-U-RS). This means that someone earning $10,000 per year in 1970 would be just as well off in 2014 earning either $61,014 (using the CPI-U) or $54,429 (using the CPI-U-RS).

The choice of time periods

When examining trends in economic indicators over time, it is generally desirable to avoid comparisons across different points of the business cycle. The income comparisons in this study are based on data pertaining to 1970, 1980, 1990, 2000, 2010, and 2014. The first three dates encompass periods of recessions (December 1969 to November 1970, January to July 1980, and July 1990 to March 1991). However, 2000 represents the peak of a business cycle, 2010 follows on the heels of the Great Recession (December 2007 to June 2009), and 2014 was the fifth year of economic expansion.54 Thus, changes in income from 1990 to 2000, from 2000 to 2010, and from 2010 to 2014 reflect, in part, the shorter-run effects of business cycles.

With regard to the wealth analysis, the dates of reference are 1983, 1992, 2001, 2007, 2010 and 2013. The first three dates represent the tail ends of recessions, 2007 is in the midst of an expansion, 2010 is again at the tail end of a recession, and 2013 is in the midst of an expansion. Data for 2007 are included to capture the impact of the Great Recession.

Households and families in census data

The Census Bureau defines a household as the entire group of persons who live in a single dwelling unit. A household may consist of several persons living together or one person living alone. It includes the household head and all of his or her relatives living in the dwelling unit and also any lodgers, live-in housekeepers, nannies and other residents not related to the head of the household.

By contrast, a family is composed of all related individuals in the same housing unit. Single people living alone or two or more adult roommates are not considered families according to the Census Bureau approach. In the vast majority of cases, each housing unit contains either a single family or single person living alone. In the case of roommates, one person is designated the “householder” (usually whoever owns the unit or in whose name the lease is held), and the other person or persons are designated secondary individuals. In a few cases, there are households with families in which neither adult is the householder. These families are designated as either related or unrelated subfamilies, depending on whether one of the adults is related to the householder.

Adjusting income for household size

Household income data reported in this study are adjusted for the number of people in a household. That is done because a four-person household with an income of, say, $50,000 faces a tighter budget constraint than a two-person household with the same income. In addition to comparisons across households at a given point in time, this adjustment is useful for measuring changes in the income of households over time. That is because average household size in the United States decreased from 3.2 persons in 1970 to 2.5 persons in 2015, a drop of 21%. Ignoring this demographic change would mean ignoring a commensurate loosening of the household budget constraint.

At its simplest, adjusting for household size could mean converting household income into per capita income. Thus, a two-person household with an income of $50,000 would have a per capita income of $25,000, double the per capita income of a four-person household with the same total income.

A more sophisticated framework for household size adjustment recognizes that there are economies of scale in consumer expenditures. For example, a two-bedroom apartment may not cost twice as much to rent as a one-bedroom apartment. Two household members could carpool to work for the same cost as a single household member, and so on. For that reason, most researchers make adjustments for household size using the method of “equivalence scales.”55

A common equivalence-scale adjustment is defined as follows:

Adjusted income = Household income / (Household size)^N

By this method, household income is divided by household size exponentiated by “N,” where N is a number between 0 and 1.

Note that if N = 0, the denominator equals 1. In that case, no adjustment is made for household size. If N = 1, the denominator equals household size, and that is the same as converting household income into per capita income. The usual approach is to let N be some number between 0 and 1. Following other researchers, this study uses N = 0.5.56 In practical terms, this means that household income is divided by the square root of household size – 1.41 for a two-person household, 1.73 for a three-person household, 2.00 for a four-person household and so on.57

Once household incomes have been converted to a “uniform” household size, they can be scaled to reflect any household size. The income data reported in this study are computed for three-person households, the closest whole number to the average size of a U.S. household since 1970. That is done as follows:

Three-person household income = Adjusted household income * [(3)^0.5]

As discussed in the main body of the report, adjusting for household size has had an effect on trends in income since 1970. However, it is important to note that once the adjustment has been made, it is immaterial whether one scales incomes to one-, two-, three- or four-person households. Regardless of the choice of household size, the same results would emerge with respect to the trends in the wellbeing of lower-, middle- and upper-income groups.

  1. DeNavas-Walt and Proctor, (2015).
  2. Burkhauser, Larrimore and Simon (2011).
  3. Business cycle dates are from the National Bureau of Economic Research (NBER).
  4. See Garner, Ruiz-Castillo and Sastre (2003) and Short, Garner, Johnson and Doyle (1999).
  5. For example, see Johnson, Smeeding and Torrey (2005).
  6. One issue with adjusting for household size is that while demographic data on household composition pertain to the survey date, income data typically pertain to the preceding year. Because household composition can change over time, for example, through marriage, divorce or death, the household size that is measured at the survey date may not be the same as that at the time the income was earned and spent (Debels and Vandecasteele, 2008).