May 1, 2012

Bucking Convention, Professor Sees Growth in Middle Class Incomes

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Research recently conducted by Prof. Richard Burkhauser, policy analysis and management, is changing national conversations about inequality and the growth of the middle class, Cornell professors said.

Burkhauser’s research shows that between 1979 and 2007, the income of the American middle class increased by 36.7 percent — more than 10 times the widely accepted growth rate of 3.2 percent published by French economists Thomas Piketty and Emmanuel Saez. Citing Piketty and Saez’s study, economists and politicians have largely agreed that the income growth of middle class Americans stagnated during this period.

However, Burkhauser, in collaboration with other researchers, showed that the median income of Americans has in fact grown significantly in the last 30 years in their study, which was published in the March issue of National Tax Journal. However, they also found that, despite this rise, income inequality has increased since 1979.

“36.7 percent growth over a long period of time — almost 30 years — is not the kind of robust economic growth that we’ve had in previous decades,” Burkhauser said.

In his analysis, Burkhauser used data from the U.S. Census Bureau and Bureau of Labor Statistics spanning 1979 to 2007. Burkhauser said he adjusted his data to account for the sizes of households, noting that a failure to account for this can lead to the conflation of “differences in the amount of income that people bring into the household with differences in the income available to people.”

He also considered government assistance programs when measuring income to, he said, accurately measure income inequality.

“Suppose someone aged 62 could continue to work but decides to retire instead. In the Piketty and Saez world of market income, this increases income inequality since this retired worker now only receives Social Security benefits, which [Piketty and Saez] don’t count,” Burkhauser said. “But in the real world, Social Security income is a resource which should be counted, and when we do so in our analysis, it reduces inequality.”

Burkhauser said that his research was spurred by public debates in the 1990s over the perceived disappearance of the middle class. He found that in the 1980s and 90s, many middle class families became wealthier, which widened the inequality gap between the upper and lower classes.

“Income inequality increased from 1979 to 1992 … Beginning in 1993, income inequality continued to increase but at a lower rate,” he said.

Although he reached a different conclusion than Piketty and Saez, Burkhauser said that his findings did not necessarily invalidate their research. In fact, Burkhauser and his colleagues were able to replicate Piketty and Saez’s results using data from the Census Bureau.

“Piketty and Saez’s use [of] tax units is one way of thinking about what’s been happening. If you use the more traditional methods that I have, you find greater growth,” Burkhauser said, adding that the two studies produced different results because they ultimately asked two distinct questions.

Prof. Alan Mathios, policy analysis and management, dean of the College of Human Ecology, attributed the quality of Burkhauser’s work to his attention to detail.

“He is a very careful, detailed, empirical researcher,” Mathios said. “He has a strong publication record [because his] work is quality: rooted in careful examination of national data sets.”

Prof. Steve Kyle, applied economics and management, said that Burkhauser’s findings show that government assistance programs play an important role in reducing income inequality in a time when the middle class continues to shrink.

“One of the take-away messages of this study is [that] even when you add in everything that can be done to make things equal, we’re still getting more unequal,” Kyle said. “If indeed it is the federal interventions that are making things more equal, we should worry about the political platform of some of the politicians who want to cut spending on all of those things. In the extreme case, if we were to eliminate all interventions, we would in fact be going back to the situation that Piketty and Saez are measuring.”

The new perspective on income inequality Burkhauser helped bring forward has already begun to spark political discourse on economic policy.

Burkhauser said he hopes that policymakers will take all available data into account when making decisions.

“When numbers are used as evidence, it is critical to understand the assumptions that generated those numbers,” he said.

Original Author: Carolyn Krupski