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Last modified: Tuesday, April 24, 2012

U.S. middle class prospering more than commonly believed, policy study finds

April 24, 2012

BLOOMINGTON, Ind. -- Long portrayed as stagnant in economic terms, the income growth of the U.S. middle class may be much greater than suggested by economists such as Thomas Piketty and Emmanuel Saez, according to a new study co-authored by an Indiana University researcher.

Median income of the U.S. middle class rose by as much as 37 percent from 1979 to 2007 says the study, "A 'Second Opinion' on the Economic Health of the American Middle Class," published in the March issue of National Tax Journal. In contrast, when Piketty and Saez-style estimates were used, median income increased by only 3.2 percent over the same period.

Authors of the National Tax Journal article are Richard Burkhauser, professor of policy analysis and management at Cornell University; Jeff Larrimore, an economist with the Joint Committee of Taxation of the U.S. Congress; and Kosali Simon, professor in the School of Public and Environmental Affairs at Indiana University Bloomington.

Unlike Piketty and Saez, who use Internal Revenue Service data in their calculations, the Burkhauser-Larrimore-Simon team uses data from the U.S. Census Bureau's Current Population Survey, showing how much the income picture changes when taxes are subtracted from market income and government transfers such as welfare assistance, unemployment insurance and Social Security benefits are added. The team also adjusted for household size and the value of health insurance -- factors Burkhauser says more accurately reflect financial resources available to middle-class individuals.

Richard Burkhauser

Richard Burkhauser

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"When we broaden our measure to include government taxes and transfers and look at households adjusted for size, the gains of middle-class Americans are 10 times larger," Burkhauser says. "The gains are even more when we include the value of in-kind income such as the value of employer- and government-provided health insurance."

The study demonstrates how the decisions one makes about what to include when measuring income, and how that income is shared, can substantially change the view of how the average American has fared over the past 30 years. It can have implications for public policy choices targeted at specific income classes, the authors say.

"This paper points out that one has to be very clear on the measurement choices made when assessing trends in income," Simon adds. "Those choices can substantially affect the story that emerges."

The National Tax Journal article is available online to members of the National Tax Association. A version of the article prepared as a working paper for the National Bureau of Economic Research is also available online.