The effect of demographic change on measured progress

by Russ Roberts on November 20, 2013

in Data, Inequality, Standard of Living

Some people misunderstood or misinterpreted my point in my recent post on the effect of a rising divorce rate on measured progress or on inequality. I argued that when the divorce rate is rising, especially when it is rising disproportionately for poorer people than for richer people, the measurement of economic progress or of inequality is going to be distorted. It’s a purely statistical point about the way household income is calculated.

Here’s a stylized example.

Suppose there is an economy with two households, each consisting of a husband and wife who are both working. One has income of $80,000 (husband and wife each earning $40,000) and one has income of $40,000 (husband and wife each earning $20,000). Average household income is $60,000.

Now suppose the husband and wife in the lower-income family get divorced. They each keep their jobs. Now there are three households, one earning $80,000 and two earning $20,000. Average household income is now $40,000. It has fallen 33% even though everyone’s individual income is unchanged.

This effect is stronger if the wife of the poorer family was not working before. If she takes a job, it is likely, for a variety of reasons to be at a lower salary than her husband’s.

So during a time when individual income is actually growing, a rise in the divorce rate, especially among families below the average income, is going to pull down the measured rate of growth.

Notice in my example that there is also a decrease in the number of people per household. This has nothing to do with having fewer children or spreading income over a smaller number of people. It’s a result of the divorce rate that leads to measured household income being a misleading representation of what is going on in the economy.

These statistical effects are not small. Again, go here and scroll down until you reach the discussion of the measured poverty rate. The actual economic progress is masked by the demographic changes.

This is important because the measured gains in income of the bottom 99% shown here are roughly zero in the 1980′s, a decade of healthy economic growth. This leads people to conclude that the top 1% got all the gains during that decade. I think that is absurd. My claim is that much or all of this depressing claim is a misreading of the data caused by demographic changes.

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