Why Is Household Income Falling While GDP Is Rising?

Publication Date: July 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

Some policymakers have marveled at the economy's recent strength, whereas others have criticized the meager fruits of this expansion. Which camp is right? The answer depends on which data are used. After recovering from a recession in 2001, economic output, as measured by gross domestic product (GDP), grew at a rapid pace of 3.5% per year between 2003 and 2005. But household income, whether determined by a mean (average) or median (sample midpoint) measurement, fell from 2000 to 2004 (the most recently available data) in real (inflation-adjusted) terms. Mean income fell from $62,671 per household in 2000 to $60,528 in 2004, and median income fell from $46,058 per household in 2000 to $44,389 in 2004. This report seeks to account for some of the leading causes of the divergence.

Household income (measured by the Census) and GDP (measured by the Bureau of Economic Analysis [BEA]) are two different concepts that are only indirectly related, which makes a direct comparison between them difficult. Fortunately, there is a measurement of personal income within the GDP accounts that makes for a more direct comparison with the Census Bureau's measurement of household income. Personal income grew more slowly than GDP from 2001 to 2005 because of the rapid growth in several statistical categories that are included in GDP but not personal income. By category, 41% of the difference can be attributed to the rise in indirect and corporate taxes, 35% to capital depreciation, 32% to undistributed profits, and 17% to statistical discrepancy. Offsetting these categories, net transfer payments grew rapidly, which boosted personal income but not GDP.

Once these adjustments are made and personal income is calculated on a household basis, the annual growth rate of personal income per household falls to 0.1% between 2001 and 2004, compared with -0.9% for the Census's mean household income. The BEA's definition of personal income includes non-cash benefits, but the Census's definition does not. Non-cash benefits have risen rapidly over the past few years and can explain most of the remaining difference between the two figures. Although personal income per household rose slightly during this period, when non-cash benefits are removed, it fell at almost the same rate that household income fell.

The recent rise in personal income has not been uniform across income categories. Wages and capital income have fallen in recent years. The decline in the latter is likely due to falling interest rates. On the other hand, non-cash benefits and transfer payments have risen rapidly. Due to the aging of the population and rising medical costs, this trend may continue in the future.

This report will be updated as events warrant.