On both sides of the atlantic, there has been a relatively long-running debate about the extent to which “decoupling” – the failure of typical household incomes to grow at a rate matching the increase in GDP – has occurred.
The classic treatment of the topic compares GDP per capita to the median family income, as Lane Kenworthy did for the USA:
The difference is clear, albeit not entirely unsurprising (what the graph shows is largely the result of the large increase in income inequality since the 1980s). Yet not everyone accepts that it demonstrates a real phenonmenon.
One objection is that the price deflator typically used to adjust GDP per capita for inflation differs from the deflator used for median family income. I’ve addressed that here by using the same deflator for both.
A second concern has to do with GDP per capita as an indicator of economic advance. Since the 1970s a larger portion of GDP has gone to replace old capital equipment and therefore can’t go to household income. Also, the number of persons has increased less rapidly than the number of households, so a per capita (per person) measure of GDP could mislead.
A third worry is that the income measure used to calculate median family income is too thin. If a growing portion of GDP has gone to employer benefits, that would help middle-class households, but it wouldn’t show up in these income data.
He addresses the second and third concerns by using a per-household measure, which includes in-kind payments and the effects of taxation. The result is a very similar graph:
This demonstrates, he says, that “decoupling is real and sizeable”.
But what about the UK? Have we got the same problem? Yes:
All the data comes from the ONS, the inflation measure used is RPI, and both median and mean household income are taken measured from after the application of taxes and distribution of benefits.
Just as in the US, income growth for middle-class households has become decoupled from growth of the economy.