May 11, 2016

America’s Shrinking Middle Class: A Close Look at Changes Within Metropolitan Areas

Methodology

Data Sources

The data in the report are derived from the public-use versions of the 2000 decennial census and the 2014 American Community Survey (ACS). The 2000 decennial census public-use file is a 5% sample of the U.S. population. The ACS contains more than 3 million records, or about 1% of the U.S. population. It is designed to collect the detailed information previously collected in the long form of the decennial census.

The ACS is conducted in every month of the year, with data collected from about one-twelfth of the total sample in each month. The monthly responses are combined to form an annual portrait of the nation and of smaller geographic units. Because of its large sample size, the ACS is one of the Census Bureau’s recommended sources for subnational income data.

The specific ACS and decennial census microdata used in this report are the Integrated Public Use Microdata Series (IPUMS) versions provided by the University of Minnesota. The IPUMS assigns uniform codes, to the extent possible, to data collected in the ACS and censuses over the years. More information about the IPUMS, including variable definition and sampling error, is available at https://usa.ipums.org/usa/.

Income

The 2000 census was conducted in April of that year and collected data on income received by a household during calendar year 1999. The ACS is a rolling monthly survey, and the household income data refer to income received during the 12 months preceding the survey month. In other words, a household surveyed in January 2014 is expected to report income received from January 2013 to December 2013, a household surveyed in February 2014 is expected to report income received from February 2013 to January 2014, and so on. Households surveyed in December 2014 report income received from December 2013 to November 2014. Thus, in the 2014 ACS, the income data refer to the period from January 2013 to November 2014, a total time span of 23 months.

Household income is the sum of incomes received by all members of the household ages 15 and older. Income is defined as 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 measurement and collection of income in the ACS is available in periodic Census Bureau reports.

In this report, incomes are adjusted for inflation with the Consumer Price Index for All Urban Consumers (CPI-U) published by the U.S. Bureau of Labor Statistics (BLS). Because the 2000 decennial census gathered data on incomes for 1999 and the 2014 ACS gathered data on incomes spanning the 2013-14 calendar years, the inflation adjustment in this report is based on the CPI-U for 1999 and the average of the price indexes from 2013 and 2014. Thus, all income data in the report are expressed in 2013-14 prices.

The choice of a price index has no bearing on 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.

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 1999 and 2013-14. The starting point, 1999, was near the peak of a business cycle, whereas 2013-14 period is in the midst of an economic expansion. 40 Thus, the income comparisons may not involve exactly comparable points in the business cycle.

Households 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.

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 3.1 persons in 1970 to 2.5 persons in 2015, a drop of 19%. 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.” 41

A common equivalence-scale adjustment is defined as follows:

Adjusted household 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. 42 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. 43

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 well-being of lower-, middle- and upper-income groups.

  1. Business cycle dates are from the National Bureau of Economic Research (NBER).
  2. See Garner, Ruiz-Castillo and Sastre (2003) and Short, Garner, Johnson and Doyle (1999).
  3. For example, see Johnson, Smeeding and Torrey (2005).
  4. 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).