Inequality, Mobility and Family Size

There was a pretty solid piece in the WSJ yesterday about income inequality and family size in the US. It's fairly often stated (especially in election years) that all of the income growth in our economy goes to the "rich", while the poor are left behind. One of the standard ways of proving this is pointing to the Census Bureau's five income quartiles and observing that in inflation adjusted dollars the bottom quintile of households has seen a flat upper limit income since 1970 (22k to 25k from 1970 to 2006).

Schiller's WSJ piece points out that the household income figures mask a huge change in American society during those 35 years.

The "typical" household, however, keeps changing. Since 1970 there has been a dramatic rise in divorced, never-married and single-person households. Back in 1970, the married Ozzie and Harriet family was the norm: 71% of all U.S. households were two-parent families. Now the ratio is only 51%. In the process of this social revolution, the average household size has shrunk to 2.57 persons from 3.14 -- a drop of 18%. The meaning? Even a "stagnant" average household income implies a higher standard of living for the average household member.

Last year, the Census Bureau published a new set of income statistics that adjusted for changing household size and composition. In a single year (2006), this "equivalence-adjusted" computation increased the income share of the poor by 8% and reduced the standard measure of inequality (Gini coefficient) by 4%. Such "equivalency" adjustments would mute unadjusted inequality trends even more.

A closer look at household trends reveals that the percentage of one-person households has jumped to 27% from 17%. That's right: More than one out of four U.S. households now has only one occupant. Who are these people? Overwhelmingly, they are Generation Xers whose good jobs and high pay have permitted them to move out of their parental homes and establish their own residences. The rest are largely seniors who have enough savings and income to escape from their grandchildren and enjoy the serenity of an independent household. Both transitions are evidence of rising affluence, not increasing hardship. Yet this splintering of the extended family exerts strong downward statistical pressure on the average income of U.S. households.

This reminded me of a discussion of household income inequality I'd heard on the EconTalk webcast in which Thomas Sowell was interviewed about his book Economic Facts and Fallacies. He also talked about the household income quintiles, and observed that the difference in household size between to top and bottom quintiles was so stark that there are 39 million people in the bottom 20% of households while there are 64 million people in the top 20%. I haven't been able to find data in some quick browsing around the Census Bureau to dig into that more, but I do recall from looking into poverty stats that the poverty rate for married households is around 5%, for families in general it's about 10%, and for "female householder with no male present" households is 30%.

Another thing that Schiller points out is that the membership in these income quintiles is far from static. There was a great WSJ piece on this a while back which discussed a study comparing 1996 and 2005 tax returns by income quintile. I've included the basic chart from that article at the left, but it's worth reading. This ties pretty well with my own experience of the last ten years.