Inequality III

by Russ Roberts on May 18, 2005

in Inequality

In yesterday’s post on inequality, I made the point that you have to be careful comparing average incomes or ratios of rich and poor incomes across time because of demographic change.  The example I used was age.  If the average age of the population falls between 1970 and 2000, you wouldn’t conclude that whoever was average in 1970 didn’t age for 30 years.  The two groups don’t have the same people in them.  Demographic changes can change measured inequality masking what is really going on in the economy.

In fact, the population has been getting older since 1970, as the baby boomers age:

2000 35.3
1990 32.9
1980 30.0
1970 28.1
1960 29.5

These data are from the US Census.

I use 1970 as the benchmark because that is the date usually used by those who are worried about inequality increasing in the US.

So if this were the only thing that had changed in the last three decades, the numbers we hear about how bad things are for the poor would actually understate how bad they are.  But this aging effect is dwarfed by two much more important changes that are usually ignored in the inequality data and that work in the other direction, overstating the amount of inequality.

As I mentioned yesterday, most reports and stories you’ll read about income inequality are looking at household data.  Let’s look at what’s happened to the number of households in the US at various dates:

2000   105 million
1990   93 million
1980   81 million
1970   63 million
1960   53 million

So between 1960 and 2000, the number of households has doubled.  What happened to population over that same period?  Again from the Census:

2000   282 million
1990   250 million
1980   228 million
1970   205 million
1960   181 million

The average American household has gotten a lot smaller:

2000   2.7
1990   2.7
1980   2.8
1970   3.2
1960   3.4

Why did this happen?  The obvious answer is that people are having fewer children.  That would lower average household size.  But that is not much of the story.  The real story is a change in the composition of families due to an explosion in divorce in the 60s and 70s.  Here’s a breakdown of the proportion of total families headed by women:

Year       Single Mothers        Single Women w/o children            Total

2000        12.1%                            17.2%                                                        29.3%
1990        11.7%                            16.8%                                                        28.5%
1980        10.8%                            15.4%                                                        26.2%
1970       8.7%                              12.4%                                                        21.1%
1960        8.4%                              9.8%                                                          18.2%

(By the way, all of these data are from the Census.  CPS data are very similar but if you stumble on CPS data via Google they won’t match these numbers exactly.)

So the proportion of households headed by single women has gone up by about 50% from 1960, 39% since 1970.  A lot of that change was unexpected to the participants, women who planned for one life and found themselves in another.  Not surprisingly, a lot of them were economically unprepared for that change and did poorly.  The poverty rate among single women is much higher than among single men or households with two parents.  (Anyone out there have a source for that?).  That means that some of the change in measured inequality isn’t due to a deterioration of opportunity but a change in the types of people trying to get ahead.  Comparing snapshot today to a snapshot in 1970 won’t tell you what happened to people in 1970 over time.

And this demographic change in female-headed households also helps explain why the poverty rate stopped declining in 1973.  It’s not the whole story, but it’s part of it.

How much of the change in measured economic inequality is due to this change in family composition?  I have no idea.  But it tells you that any comparison of household income today vs. 1970 is an apples and oranges comparison.  To get rid of the effect of this composition change and isolate the state of opportunity, you’d have to hold constant family composition and ask the question, between 1970 and today, how have married couples with children fared over time, how have single women with or without children fared over time?

I’ll try and get some data on that for my next post.  In the meanwhile, there is another major demographic change that has to be accounted for if you want to know about inequality and that is due to immigration.  More in the next post.

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