Less Cash in their Pockets: Trends in Incomes, Wages, Taxes, and Health Spending

Publication Date: October 2004

Publisher: Economic Policy Institute

Author(s): Elise Gould; Michael Ettlinger; Lawrence Mishel

Research Area: Economics

Type: Brief

Abstract:

The economic well-being of middle-income families has changed significantly over the last few years, largely as a result of three important dynamics. First, the recession that started in March 2001 was followed by an unusually long period--two and a half years--of job losses, despite an increase in output of goods and services. Although employment has grown since September 2003, it has not done so at a sufficient rate to diminish the substantial labor slack generated by the downturn in 2001 (Mishel et al. 2004). Consequently, pre-tax incomes fell for three years in a row, leaving the typical household with $1,535 less income in 2003 than in 2000, a drop of 3.4%. This decline in income was primarily the result of lost work opportunities from fewer family members working and fewer hours worked per worker (fewer weeks per year and fewer hours per week).

A second dynamic influencing family economic well-being is the income tax reductions legislated at the federal level, primarily those of 2001 and 2003. It is important to assess the degree to which shifts in taxation have offset the recession-induced income losses.

Finally, the health care costs facing families have surged as insurance premiums and out-of-pocket costs have grown rapidly over the past few years (Families USA, September 2004).

This report measures the net effect of these factors on middle-class family incomes. In particular, we estimate the inflation-adjusted change between 2000 and 2003 in three income measures: pre-tax incomes, after-tax incomes, and after-tax and after-health-spending incomes. We do so for three types of families--married couples with children, single mothers, and elderly couples (over age 65)--and for young single persons (age 25-34).