* Last week, the Census Bureau released its annual report on income, poverty, and health insurance coverage in 2003. It found real median income stayed about the same while both the number and percentage of Americans living in poverty and without health insurance increased between 2002 and 2003.
* While a major reason for the weak 2003 numbers was the slow economic recovery, especially in the labor market, these indicators of well-being also reflect a longer term trend of little progress in all three areas.
* This report provides insight into the economy in several ways. First, the skew in income growth across socioeconomic classes has implications for the composition of consumption. Second, for the labor market, rising health insurance costs are increasingly seen as not only reducing health care coverage but also slowing employment growth.
Income, Poverty, and Health Insurance: Many Left Behind
Last week, the Census Bureau released its annual report on income, poverty, and health insurance coverage. This report provides a snapshot of the well-being of American families in 2003.
Real median household income was virtually unchanged, declining by $63 to $43,318 in 2003 from 2002. This is the fourth consecutive decline for median income (the peak in 1999 was $44,922). The poverty rate increased to 12.5% in 2003, the third consecutive increase, resulting in 1.3 million more Americans living in poverty. The health insurance coverage statistics were just as weak, as the number of Americans without health insurance increased by 1.6 million, to 45.0 million. The percentage of Americans without health insurance increased to 15.6% from 15.2%, the third consecutive increase.
Because these indicators are generally correlated with the strength of the economy, it is likely that the welfare of American families improved between 2003 and 2004 as the economy improved (although there are still doubts on the labor market recovery). While it is easy to blame the weak 2003 income, poverty, and health insurance numbers on the economy, it is important to note that there are longer term trends reflected in the data.
First, real median household income has grown very slowly over the past quarter-century, averaging less than 0.5% a year (declining household size only accounts for a small part of this weakness). Real mean income growth was double that, averaging more than 1% a year. Most of the gains from economic growth over the last several decades have been going to affluent families. Indeed, an argument could be made that low-income households have made almost no gains. For example, household income at the 10th percentile in 2003 was $10,536, only slightly higher than the $9,589 figure in 1979. The change in the 90th percentile over the last quarter-century, on the other hand, was significant, rising from $88,588 to $118,200. While low- and median income data have fallen over the past few years, it is important to note that they are part of a longer term trend of nearly zero growth, partially due to rising income inequality.
One of the reasons for increasing income inequality is globalization. Globalization, which often provides low priced imports and lower production costs abroad, has, most likely, held back wage and job growth for less-educated workers. However, this does not fully account for some aspects of the growing income inequality, such as the rapid rise in the CEO/average worker pay ratio, which increased to over 400 from 40 between 1980 and 2000. Emmanuel Saez and Thomas Piketty, in a 2001 paper entitled "Income Inequality in the United States, 1913-1998" attribute much of this growing income inequality to changing social norms. Another possible reason for this rising income inequality is technology, as Robert Frank discusses in his book The Winner-Take-All Society. For example, with the spread of television and compact discs, the profile (and pay) of national celebrity athletes or musicians increased rapidly while that of local athletes or musicians fell, as people now had access to the national scene.
Second, there has not been much progress in reducing poverty. For example, the poverty rate in 1979 was 11.7%, with 26.1 million Americans living in poverty. During the early 1980s and 1990s, during times of economic downturns, the poverty rate increased, followed by declines the rest of the decade as the economy expanded. While the poverty data are cyclical, there has been no real progress in reducing poverty since the 1960s (poverty rate declined from 22.2% in 1960 to 12.1% in 1969). One possible explanation is the decline in the real minimum wage. The current inflation-adjusted minimum wage is about 30% lower today than in 1979.
Finally, the percentage of people without health insurance has increased almost every single year since 1987 (the first year Census released such data), from 12.9% in 1987 to 15.6% in 2003.
This report provides two major insights into the economy. First, rising income inequality has implications for the composition of consumer spending. Sales data from retailers show that high end retailers have done better recently than medium or low-end retailers.
Second, all three of these indicators are tied closely to the labor market. Much has been made of the length of this jobless recovery. While an improving labor market is generally seen to increase health care coverage, one of the reasons why the labor market has recovered so slowly is the double-digit percent increases in health care insurance costs. Soaring health care costs may make employers more reluctant to hire employees or provide health care benefits.
This report reveals much progress has to be made in reducing poverty and raising incomes and health insurance coverage, especially for low-income individuals, before the vision of a broad "ownership society" can occur. In a global economy, education is key. Thus, improving the quality of US primary and secondary education would be very helpful in reversing the recent trends in income inequality and poverty.
Avinash Kaza