Economic Indicators | Wages, Incomes, and Wealth

Income Picture: September 26, 2003

September 26, 2003

Poverty rises and middle-class incomes fall for second year running

Poverty deepened and household income fell in 2002, according to the latest report by the U.S. Bureau of the Census. These data mark the second consecutive year in which poverty rose and real income fell for middle-class households, suggesting that both the recession and ensuing weak recovery have eroded Americans’ living standards.

Today’s report from the Census includes annual data on household income, as well as information on the number and share of the population in poverty. The poverty rate rose to 12.1% in 2002 from 11.7% in 2001, adding 1.7 million to the ranks of the poor. The number of poor grew to 34.6 million people last year, including 12.1 million children. Since 2000, poverty is up by just under one percentage point (11.3% to 12.1%).

Median household income—the income of the household in the middle of the income scale (half have lower incomes; half have higher incomes)—fell 1.1% after adjusting for inflation last year, and it has dropped 3.3% over the past two years. This decline represents a loss of $491 (2002 dollars) in income for these households last year and $1,439 over the past two years.

Change in median family income--first year of recovery

Income trends differed significantly by race. African American and Hispanic households, with incomes already far below those of white households, experienced the most significant declines. The real median household income of blacks fell by 3.0%; Hispanic households lost 2.9%. The median household incomes of non-Hispanic whites, however, did not show a statistically significant decline. The total decline in median household income since 2000 was 6.3% for African Americans, 4.4% for Hispanics, and 1.6% for non-Hispanic whites.

The weak recovery also led to higher poverty rates for the second consecutive year. Nearly one in four African Americans (24.1%) and more than one in five Hispanics (21.8%) were poor in 2002, compared to one in 12 non-Hispanic whites (8.0%). Blacks saw the largest increase in their poverty rate. These findings are particularly relevant in the context of welfare reform, a policy highly dependent on a booming job market for its success.

These losses occurred despite the fact that the economy grew during 2002. The recession, which began in March 2001, officially ended in November of that year, meaning that 2002 was the first full year of the new economic expansion. Although the economy grew that year, economic growth does not automatically translate to growth in the income of the typical household when families are facing such a weak job market. In fact, in 2002 labor market conditions actually worsened, as unemployment rose and job losses continued to mount.

This dynamic effects today’s results in two important ways. Most obviously, when people work fewer hours per year due to job loss or partial cutbacks in hours worked, their annual income can fall (one measure of total hours worked in the economy shows a 2.5% decline in 2002). In addition, with unemployment rising throughout the year—the unemployment rate went from 5.6% in the first quarter of 2002 to 5.9% in the last quarter—there was less wage pressure in the labor market, and wages grew more slowly for most workers. This combination of fewer hours and slower hourly wage growth help explain why incomes fell and poverty rose last year.

This is not the first recovery during which household and family income fell (the main difference between households and families is that the former includes one-person units, while the latter refers to two or more related persons—the accompanying chart focuses on family income since these data go back much further than the household data). The last recovery, which began in 1991, was also weak in terms of labor market recovery, and therefore income growth, with real family income falling in the first three years of the recovery (1991-93). However, as the chart reveals, in most other cases, economic expansions have led to stronger labor markets and resultant gains in median household income, even in the first year.

The Census also provides information on income changes of households at different income levels. These data help gauge how different income classes are faring and also provide evidence of movements in income inequality. Household income losses occurred throughout the income scale, providing evidence of the broad-based nature of the jobless recovery. The average income of households in the lowest fifth fell 3% in 2002, about the same as that of the top fifth. Within the top fifth, income of the wealthiest 5% of households fell by 5.1%, this group’s largest one year loss since 1980. These broad-based losses mean that inequality did not increase in 2002, as the weak economy generated fairly egalitarian losses.

The last jobless recovery in 1990-91 was a historically bad one for income growth, and today’s results raise the question as to whether this pattern is repeating itself. Based simply on job market performance thus far in 2003, we can expect a similarly weak income report next year at this time. Total hours fell at an annual rate of 1.6% in the first half of the year and unemployment has ticked up as well.

Furthermore, economic forecasts for 2004 suggest the jobless recovery is expected to persist (e.g., the Congressional Budget Office predicts that unemployment will be 6.2% next year). Thus, the U.S. economy appears to be stuck in another weak recovery that is yielding few benefits for middle- and low-income households. Forecasts for where the economy is headed suggest a continued gap between overall growth and the living standards of working families.

Jared Bernstein and Jeff Chapman
Research assistance provided by Sujan Vasavada and Yulia Fungard

The Economic Policy Institute INCOME PICTURE is published upon the annual release of family income data from the Census Bureau.

EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.

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