Challenging the Middle Class Stagnation Myth: From 1979-2007 The Rich Got Richer and Poor Got Richer

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It’s a familiar and frequently-told narrative that middle-class incomes have stagnated over the last several generations while the upper-income groups have gotten richer.  President Obama has promoted this narrative by claiming in 2009 that  “For many years, middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy."

But a new working paper titled “A "Second Opinion" on the Economic Health of the American Middle Class” by NBER and Cornell researchers provides new evidence that the popular narrative is largely mistaken.  By taking into account previously unmeasured shifts in household size and the tax units in them, taxes paid, transfer payments received, and the increasing importance of fringe benefits, the researchers find that the growth in after-tax household income has been substantial not only for the middle class, but for all income groups over the last 30 years.

From the paper:  

“The median pre-tax pre-transfer income of all tax units (filers and non-filers) only increased by 3.2% in real terms over the entire period between 1979 and 2007. These results are consistent with the view that the typical American has not gained much from economic growth over the last 30 years.

But when we broaden the sharing unit to the household, account for economies of scale in household consumption, and recognize that the payment of taxes or the receipt of tax credits as well as government transfer income and in-kind benefits all impact the economic resources available to individuals, we find the story changes. Specifically, when using our broadest measure of available resources—post-tax, post-transfer size-adjusted household income including the value of in-kind health insurance benefits—median income growth of individual Americans improves to 36.7% over the period from 1979 and 2007.

The table above illustrates the change in income for each income quintile over the entire 29 year period. Importantly, in contrast to tax unit market income measures of income where the bottom two quintiles get poorer (first column of data) and only the top quintile gets noticeably richer, each of the other series shows income growth throughout the distribution. Once taxes and health insurance are taken into account, each of the quintiles of the distribution are shown to have sizable growth over the 29 year period - with the slowest growth being a 26.4% increase in mean incomes for the bottom quintile of the distribution (last column). Growth in the middle quintile is 36.9%, dramatically greater than their 2.2% growth in private market income when measured at the tax unit level."

Conclusion: "These more inclusive measures of access to economic resources suggest that income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. Growth was substantial in all quintiles once the influence of government tax and transfer policy as well as the shift in compensation from wages to health insurance provided by employers and the shift to increased in-kind health insurance by government is more full recognized.

MP: The findings in this paper provide strong, empirical evidence contrary to the middle-class stagnation story, and in fact show that over the last thirty years "the rich got richer and the poor got richer" after making adjustments for household composition, taxes, transfer payments and fringe benefits to measure "access to economic resources."