Why Is Household Income Falling While GDP Is Rising?

CRS Report for Congress
Why Has Household Income Fallen in the
Current Expansion While GDP Has Risen?
Updated August 30, 2006
Marc Labonte
Specialist in Macroeconomics
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Why Has Household Income Fallen in the Current
Expansion While GDP Has Risen?
Summary
Some policymakers have marveled at the economy’s recent strength, whereas
others have criticized the meager fruits of this expansion. Which camp is right? The
answer depends on which data are used. After recovering from a recession in 2001,
economic output, as measured by gross domestic product (GDP), grew at a rapid pace
of 3.5% per year between 2003 and 2005. But household income, whether
determined by a mean (average) or median (sample midpoint) measurement, fell from
2000 to 2004 in real (inflation-adjusted) terms. It rose about 1% in 2005, but remains
below 2000 levels. Mean income fell from $64,767 per household in 2000 to
$63,344 in 2005, and median income fell from $47,599 per household in 2000 to
$46,326 in 2005. This report seeks to account for some of the leading causes of the
divergence.
Household income (measured by the Census) and GDP (measured by the Bureau
of Economic Analysis [BEA]) are two different concepts that are only indirectly
related, which makes a direct comparison between them difficult. Fortunately, there
is a measurement of personal income within the GDP accounts that makes for a more
direct comparison with the Census Bureau’s measurement of household income.
Personal income grew more slowly than GDP from 2001 to 2005 because of the rapid
growth in several statistical categories that are included in GDP but not personal
income. By category, 41% of the difference can be attributed to the rise in indirect
and corporate tax receipts, 35% to capital depreciation, 32% to undistributed
corporate profits, and 17% to statistical discrepancy. Partially offsetting these
categories, net transfer payments grew rapidly, which boosted personal income but
not GDP.
Once these adjustments are made and personal income is calculated on a
household basis, the annual growth rate of personal income per household falls to
0.1% between 2001 and 2005, compared with -0.4% for Census’s mean household
income. BEA’s definition of personal income includes non-cash benefits, but
Census’s definition does not. Non-cash benefits have risen rapidly over the past few
years and can explain the remaining difference between the two figures. Although
personal income per household rose slightly during this period, when non-cash
benefits are removed, it fell at the same rate that household income fell.
The recent rise in personal income has not been uniform across income
categories. Wages and capital income have fallen in recent years. The decline in the
latter is likely due to falling interest rates and BEA’s omission of capital gains. On
the other hand, non-cash benefits and transfer payments have risen rapidly. Due to
the aging of the population and rising medical costs, this trend may continue in the
future.
This report will be updated as events warrant.

Contents
Where Do the Data Come From and What Do They Measure?..............2
Estimating the Causes of the Divergence Between GDP and Household
Income Growth...............................................3
Differences in the Growth Rates of GDP and the BEA’s Personal
Income Measure...........................................3
Comparison of the Growth Rates of the BEA’s Personal Income and
the Census’s Household Income..............................6
Future Trends.....................................................9
Conclusion ......................................................11
List of Figures
Figure 1. GDP vs. Household Income, 2000-2005........................1
Figure 2. Growth Rates of Real GDP and Real Personal Income, 2000-2005...4
Figure 3. Different Measures of Income Per Household, 2000-2005..........9
Figure 4. Personal Income and Worker Compensation as a Percentage
of GDP, 1929-2005...........................................10
List of Tables
Table 1. Sources of the Difference Between the Growth Rates of GDP and
Personal Income...............................................5
Table 2. Real Personal Income per Household, by Type, 2000-2005 .........7

Why Has Household Income Fallen in the
Current Expansion While GDP Has Risen?
Some policymakers have marveled at the economy’s recent strength, whereas
others have criticized the meager fruits of this expansion. Which camp is right? The
answer depends on which data are used. After recovering from a recession in 2001,
economic output, as measured by gross domestic product (GDP), grew at a rapid pace
of 3.5% per year between 2003 and 2005. But household income, whether
determined by a mean or median measurement, fell from 2000 to 2004 in real
(inflation-adjusted) terms.¹ It rose about 1% in 2005, but remains below 2000 levels.
Mean income fell from $64,767 per household in 2000 to $63,344 in 2005, and
median income fell from $47,599 per household in 2000 to $46,326 in 2005. These
figures are widely cited in discussions of the economic welfare of the typical
American family. Figure 1 shows the divergence between GDP and household
income since 2000.
Figure 1. GDP vs. Household Income, 2000-2005

13,000100,000
12,50090,000
12,00080,000

005 $ $

11,500f 270,000
11,000il o60,0002005
b
10,50050,000
10,00040,000
20 00 2001 200 2 2 003 2004 20 05
GDPmean household income
median household income
^Source:^Bu^reau^of^Econ^om^{ic A}ⁿ^aly^s^is^{, C}^eⁿ^s^u^s^Bu^reau^.
^No^tes:^A^l^l^m^eas^u^r^es^{are adj}^u^s^t^{ed f}^o^{r i}ⁿ^f^l^atⁱ^oⁿ^.^G^D^Pⁱ^s^m^e^a^s^u^r^{ed i}ⁿ^{2005 dol}^l^a^rs^u^sⁱⁿ^g^t^h^{e G}^D^P
^def^l^at^{or. H}^o^u^s^eh^ol^{d i}ⁿ^com^eⁱ^s^m^eas^u^r^{ed i}ⁿ^{2005 dol}^l^a^rs^u^sⁱⁿ^g^t^h^{e con}^s^u^m^{er pri}^{ce i}ⁿ^dex^(C^PI).
¹ U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United
States: 2005, August 2006. Mean measures the sample’s average; median measures the
sample’s midpoint. Mean income is higher than median income because of very high
income levels at the end of the sample’s distribution.

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This report seeks to account for some of leading causes for the divergence. The
following section explains the difference between the various measures being
evaluated.
Where Do the Data Come From and
What Do They Measure?
Household income is released by the Census Bureau in the Department of
Commerce and based on the Annual Social and Economic Supplement to the Current
Population Survey (CPS), which is prepared jointly by the Bureau of Labor Statistics
in the Department of Labor and the Census Bureau. It is a survey of 77,000
households based on the respondent’s recollection.
Gross domestic product (GDP) is estimated by the Bureau of Economic
Analysis in the Department of Commerce. It is the broadest measure of economic
activity and includes personal consumption expenditures, fixed investment, net
exports (exports less imports), and government consumption and investment. Within
GDP, private sector production is measured through various surveys of business
shipments, output, sales, and so on.
Household income and GDP are two different concepts that are only indirectly
related, which makes a direct comparison difficult. Fortunately, there is a
measurement of personal income within the GDP accounts that makes for a more
direct comparison with the Census Bureau’s measurement of household income. By
accounting identity, personal income can be derived from GDP based on the
following modifications. First, GDP is converted into GNP (gross national product).
GDP measures the production of goods and services by anyone (regardless of
nationality) within U.S. borders, whereas GNP measures the production of goods and
services by Americans anywhere in the world. Second, GNP is converted to net
national product by deducting capital depreciation. By identity, net national product
is equal to national income because anything produced by an American generates
equivalent labor and capital income that flows to an American.
National income can then be converted into personal income through the
following modifications. First, corporate profits, indirect taxes, business interest,
surpluses of government enterprises, and transfer payments are removed from
national income. After-tax corporate profits are then retained by the corporation or
paid out as dividends. Dividends and interest become capital income, which, along
with transfer receipts, is then added back to personal income.
Personal income consists of employee compensation (wages and fringe
benefits), capital income (dividends, interest, and rental income), proprietors’
income, and transfer payments (e.g., Social Security) less social insurance
contributions. Employee compensation is benchmarked against unemployment
insurance records that cover 96% of total employment.

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In theory, the only broad difference between the BEA’s measurement of
personal income and the Census Bureau’s measurement of household income is that
personal income is an aggregate measurement and household income is measured per
household. Mean personal income per household can easily be derived by dividing
personal income by total households, but a measure of median personal income
cannot be calculated.²
For discrepancies between household income based on the CPS and personal
income from the GDP accounts that cannot be attributed to differences in definition,
the GDP accounts would be considered a superior data source. It is based on a much
larger sample (so standard errors would be smaller), and it is benchmarked against
“hard” records rather than unverified personal recollection. The Census Bureau
identifies several sources of non-sample error that could statistically bias the CPS
results: a non-response rate of 17.4%, definitional difficulties, different
interpretations of the questions by different respondents, inability or unwillingness
to provide correct information, inability to recall information (e.g., respondents may
forget to include small sources of income), undercoverage, and so on.³ These types
of errors are generally less problematic for data from the GDP accounts.
Estimating the Causes of the Divergence
Between GDP and Household Income Growth
Based on the technical explanation presented above, the broad question of why
GDP is rising when household income is falling can be split into two parts. The next
section explores the first part: within the GDP accounts, why is GDP rising more
rapidly than personal income? The second section explores the second part: how
does the BEA’s measure of personal income compare to the Census’s measure of
household income?
Differences in the Growth Rates of GDP and
the BEA’s Personal Income Measure
As Figure 2 illustrates, GDP has been consistently growing at a faster pace than
the BEA’s measure of personal income. From 2001 to 2005, real GDP grew at an
average rate of 2.6%, whereas real personal income grew at an average rate of 1.4%.
Personal income is reported only in nominal terms; to compare it with GDP, it must
first be deflated by a price index. An index of consumer goods, such as the consumer

² For specific definitional differences between the data sources, see John Ruser et al.,
Alternative Measures of Household Income, working paper presented to Federal Economic
Statistics Advisory Committee, Bureau of Labor Statistics, November 2004, and U.S.
Census Bureau, Comparability of Current Population Survey Income Data With Other Data,
at [http://www.census.gov/hhes/www/income/compare1.html], accessed August 30, 2006.
³ U.S. Census Bureau, Source and Accuracy of Estimates for Income, Poverty, and Health
Insurance Coverage in the United States: 2004, August 2005.

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price index (CPI), is often chosen because most personal income is spent on
consumption. The choice of index does make a difference in the calculations: the
CPI has been rising more quickly than the broader-based GDP deflator in the 2000s,
so using the CPI instead of the GDP deflator reduces the annual growth rate of
personal income by 0.2 percentage points. In other words, part of the reason
household income is growing more slowly than GDP is because the price of personal
consumption is rising more quickly than the price of overall production. Some
economists have described this as a negative movement in the “terms-of-trade” for
workers.
Figure 2. Growth Rates of Real GDP and Real Personal Income,

2000-2005

3%te
2% ra
1%wth
o
0%gr
200 0 2001 2002 2003 2 004 2005
real personal incomereal GDP
^Source:^{CRS calcu}^latioⁿ^s^u^sⁱⁿ^g^d^a^{ta f}^r^o^m^B^u^r^eau^o^f^Ecoⁿ^o^m^{ic A}ⁿ^aly^s^is.
^No^tes:^GDP^{is ad}^j^u^sted^f^o^rⁱⁿ^f^l^atioⁿ^u^sⁱⁿ^g^th^{e GDP}^d^e^f^l^ato^r^{. P}^e^r^s^oⁿ^alⁱⁿ^co^m^e^is^ad^j^u^sted^f^o^rⁱⁿ^f^l^atioⁿ
^usi^{ng t}^h^e^CP^I^.
Even after accounting for the difference in price indices, a large gap in growth
rates remains. Table 1 estimates the major contributors to the difference in growth⁴
rates since they began to diverge in 2002. Between 2001 and 2005, GDP grew by
$2,359.1 billion and personal income grew by $1,513.6 billion, a difference of $845.5
billion, as seen in the Table 1.⁵ Of the several adjustments made to convert GDP
into personal income, the largest source of difference was corporate and indirect
(mostly local) tax receipts, which grew by $348.7 billion between 2001 to 2005.
Corporate and indirect tax receipts are levied before income is paid out to
⁴ There are other adjustments made to convert GDP to personal income, but their growth
between 2001 and 2005 was relatively insignificant.
⁵ All data in this discussion are in nominal terms because there are not price indices
available to deflate all of the data involved.

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individuals, so neither is included in personal income. The second largest cause of
GDP’s more rapid growth was the $292.6 billion increase in capital depreciation.
Some output is used to replace depreciated capital and thus does not become personal
income.
Table 1. Sources of the Difference Between the Growth Rates
of GDP and Personal Income
Change 2001-2005,Contribution to overall
billions of dollarschange (%)
Difference between GDP and$845.5100%
personal income
Corporate and indirect taxes$348.741
Capital depreciation$292.635
Undistributed corporate profits$267.332
Net transfers-$205.4-24
Statistical discrepancy$144.617
Other (net)$2.3<1
^Source:^C^R^S^cal^cu^l^a^tⁱ^oⁿ^s^bas^e^{d on}^dat^a^f^r^om^t^h^{e Bu}^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^.
^No^te:^{Data are n}^o^{t adj}^u^s^t^{ed f}^o^{r in}^f^l^ation^.
Corporate profits have grown rapidly in recent years. Corporate profits can
either be paid out in taxes or dividends (which are included in personal income) or
retained by the corporations. The latter, which are classified as undistributed
corporate profits, rose by $267.3 billion between 2001 and 2005, accounting for 32%
of the divergence between GDP growth and personal income. Of course, corporations
are owned by individuals, whose net wealth eventually rises when profits are retained
through capital gains. But capital gains are not included in the GDP accounting
framework, which measures only current production and the income generated by
that production. Appreciation in the value of an existing asset does not change
production levels, and so it is not considered to have altered the income of its owner.
In this sense, because GDP includes undistributed corporate profits and personal
income does not, the former is a better proxy of well-being (for capital owners) than
personal income.
Transfers received by individuals grew by $205.4 billion more than business
transfer payments and contributions to social insurance from 2001 to 2005. The
difference between the two, referred to as net transfers in Table 1, caused personal
income to grow more quickly than GDP, thereby offsetting 24% of the difference
between GDP growth and personal income growth.
In theory, net national product and national income should be equal. Due to
measurement error, there will always be a statistical discrepancy between the two,

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and the growth of this discrepancy from 2001 to 2005 equaled $144.6 billion.
Because the cause of the statistical discrepancy is not known, it is not known if, in
reality, GDP grew more slowly or personal income grew more rapidly than reported.
Comparison of the Growth Rates of the BEA’s Personal
Income and the Census’s Household Income
The previous section estimated why the BEA’s measure of personal income has
grown more slowly than GDP in recent years. Although this helps explain the
difference between GDP growth and household income growth in recent years, it
does not explain why the BEA shows personal income growing while the Census
shows household income falling.
One further modification can be made to the BEA personal income data to make
it more comparable to the Census household income data. Part of the growth in
aggregate measures such as personal income and GDP comes from growth in the
labor force: more workers can produce more output. Thus, data measured on a per
capita or per household basis will always increase more slowly than aggregate data
because of population growth. Making this adjustment eliminates much of the
difference between the two measures: the BEA’s personal income growth per
household averaged 0.1% and the Census’s mean household income growth averaged⁶
-0.4% from 2001 to 2005. (By comparison, GDP per household has risen 1.2% a
year during that period.) In other words, according to the BEA’s data, the number⁷
of households has risen almost as quickly as personal income in recent years.
Personal income, as defined by the BEA, is a broader measure than one might
assume. In addition to wages, it includes asset income from interest and dividends,
rental income, government transfer payments, fringe benefits, and so on. In principle,
the Census definition of income also includes asset income, transfer payments, and
business income, but it does not include non-cash fringe benefits. As the Census
notes, however, interviewees may neglect to report minor sources of income, so
wages may be more likely to be reported than other income sources for the average
household. Thus, both personal income and mean household income are all-inclusive
concepts that include everyone, from very wealthy households with income primarily
from assets to more modest households with income primarily from worker
compensation. Therefore, some popular explanations for why income growth is
lagging behind GDP growth (such as globalization, inequality, and more competitive

⁶ Perhaps more puzzling, however, is the difference in the levels of income reported by the
Census and the BEA. According to the BEA, mean personal income per household equaled
$88,685 in 2005; according to the Census, mean household income equaled $63,344. Most
of the difference is due to definitional differences, namely personal income’s inclusion of
imputed income from owner-occupied housing, in-kind federal transfers, adjustments for
under-reported income, and income received by pension plans and nonprofits. After these
adjustments are made, personal income is still 13% higher than household income.
⁷ Disposable personal income (personal income less taxes) has grown more rapidly than
personal income in recent years because of tax cuts.

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labor markets) are unlikely to be sufficient because both income measures include
capital income. Median household income, on the other hand, measures only the
mid-point observation in the sample and is unreflective of what is happening to the
rest of the population. Table 2 shows how these different sources of income have
grown in recent years.
Table 2. Real Personal Income per Household, by Type,
2000-2005
(2005 dollars)
^Percentage
^ch^an^ge,
²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵^2000-2005
^Pers^on^alⁱⁿ^com^e^88,307^88,026^86,644^86,879^88,717^88,685^0.4%
^Wag^e^s^50,590^49,872^48,589^48,428^49,225^49,483^-²^.2%
^Ben^e^fⁱ^t^s^9,988^10,083^10,⁸³¹^11,465^11,856^12,135^21.5%
^P^r^o^p^r^ieto^r^s^’^7,631^7,788^7,496^7,677^8,125^8,132^6.6%
ⁱⁿ^co^m^e
^A^sse^{t a}ⁿ^d
^ren^t^al^16,104^15,613^14,497^13,932^13,981^13,256^-^17.7%
ⁱⁿ^co^m^e
^N^e^t^t^r^an^s^f^ers³^,994^4,670^5,231^5,376^5,529^5,679^42.2%
^S^o^urce:^C^R^{S calcu}^lation^s^u^sⁱⁿ^g^{data f}^r^om^th^{e B}^u^reau^of^Econ^om^{ic A}ⁿ^aly^s^is^an^{d B}^u^reau^of^La^b^o^r
^Statistics.
^No^tes:^D^a^t^a^a^d^j^u^st^e^d^fo^rⁱⁿ^fl^a^tⁱ^oⁿ^usi^ng^t^h^e^c^o^nsum^e^r^{price in}^dex^(C^P^{I). T}^h^{e percen}^tag^e^ch^an^g^e^f^o^r
^2000-^{2005 i}^s^cu^m^u^l^a^tⁱ^v^e.
Because the BEA provides only aggregate data, personal income data can be
directly compared only to mean, not median, income. Analysts using BEA data who
are interested in the well-being of the “typical” household would most likely consider
employee compensation (wages plus benefits), because it makes up the bulk of
income for that household.⁸ Employee compensation per household fell in real terms
in 2001 and 2002, but has risen since then. It did not surpass its 2000 level until
2004. Overall, it grew at an annual average of 0.3%, considerably more slowly than
personal income from 2001 to 2005. As shown in Table 2, wages fell slightly
between 2000 and 2005. But this fall has been more than offset by a rise in fringe
benefits, so workers are 1.7% better off overall than they were in 2000.⁹

⁸ According to the Federal Reserve’s Survey of Consumer Finances, the median value of a
household’s financial assets was $29,800 in 2004, which would generate a very modest
annual income stream compared with labor compensation.
⁹ To the extent that the rise in benefits has been driven by medical price inflation, the rise
in benefits in Table 2, which has been adjusted by the rise in overall prices, is exaggerated
because medical price inflation has greatly exceeded overall price inflation.

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Proprietors’ (e.g., small business owners) income rose during that period as
well. Economists classify proprietors’ income as a combination of labor and capital
income because unincorporated business owners typically contribute both labor and
capital to their businesses, so the rise in proprietors’ income can be thought to accrue
to both workers and capital owners.¹⁰
Perhaps surprisingly, capital income has fallen over the past five years. Looking
at its subcomponents, it turns out that the fall is concentrated in rental income and
interest income, which presumably reflects the decline in interest rates over the past
five years. The other subcomponent, dividend income, has risen during that period.
The rise in undistributed corporate profits during this period suggests that capital
income has risen in ways that are not captured in GDP accounting, such as through
capital gains. For example, the Federal Reserve’s measure of total household net
worth has risen from $41,543 billion in 2000 to $52,430 billion in 2005, suggesting
that, by a broader definition, capital income has risen, not fallen. Equities declined
in value from 2000 to 2003 and have risen since, although they still have not reached
their high in 2000. House prices have risen in value rapidly throughout the 2000s.
Finally, transfer income (net of social insurance contributions) has risen sharply
in recent years. This primarily reflects the recent rise in government entitlement
spending, mostly caused by demographic change. This suggests that a major source
of income growth over the past few years was concentrated within a subset of the
population.
The major component of the BEA’s personal income not included in the
Census’s household income is non-cash benefits.¹¹ Because benefits rose quickly
from 2000 onward, this difference is an important one. Omitting them yields a result
similar to the pattern found in the Census data. As seen in Table 2, real wages per
household fell from 2000 to 2003. They rose in 2004 and 2005 but are still 2.2%
below their 2000 level. And indeed, even the broadest definition of cash income
(personal income less benefits) follows the pattern of the Census’s data fairly closely:
it falls in each year from 2001 to 2005, except 2004, and has fallen by 2.3% from its
level in 2000. Figure 3 compares the movement in some of the measures discussed
since 2000.

¹⁰ If two-thirds of proprietors’ income is counted as wages — a standard assumption — then
wages still fell from 2000 to 2005, albeit at a slower pace.
¹¹ The questionnaire reads, “Which category represents the total combined income of all
members of this FAMILY during the past 12 months? This includes money from jobs, net
income from business, farm or rent, pensions, dividends, interest, social security payments
and any other money income received by members of this FAMILY who are 15 years of age
or older.” Although household income does not include pension contributions such as
personal income, it does include pension disbursements.

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Figure 3. Different Measures of Income Per Household, 2000-2005

¹⁰⁰^,⁰⁰⁰
⁹⁰^,⁰⁰⁰
⁸⁰^,⁰⁰⁰
s
⁷⁰^,⁰⁰⁰llar
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05 d
⁵⁰^,⁰⁰⁰20
⁴⁰^,⁰⁰⁰
²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵
^pe^r^s^oⁿ^a^lⁱⁿ^c^o^m^e^p^e^r^s^.ⁱⁿ^co^m^e^l^e^ss^b^eⁿ^e^fⁱ^t^s
^wa^g^e^s^m^e^an^ho^us^eh^o^l^dⁱⁿ^c^o^m^e
^m^e^dⁱ^{an ho}^us^e^h^o^l^dⁱⁿ^c^o^m^e
^Source:^F^o^r^pers^on^alⁱⁿ^com^e^an^{d w}^a^g^e^s^,^C^R^S^cal^cu^l^a^tⁱ^oⁿ^s^bas^e^{d on}^Bu^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^;
^f^o^{r m}^ean^an^{d m}^e^dian^h^o^u^s^eh^{old in}^com^e^{, C}^eⁿ^s^u^s^B^u^reau^.
^No^tes:^P^e^rs^on^{al in}^com^e^,^pers^on^alⁱⁿ^com^e^les^s^ben^e^f^its^{, an}^{d w}^a^g^e^s^{are m}^eas^u^r^{ed per h}^o^u^s^eh^{old. A}^l^l
^dat^a^{are ex}^pres^s^e^{d i}ⁿ^{2005 dol}^l^a^rs^u^sⁱⁿ^g^t^h^{e C}^P^I.
Future Trends
Since the GDP accounts were first recorded, personal income has fluctuated
between about 75% and 85% of GDP, as seen in Figure 4. Since the early 1980s, it
has tended toward the high end of that range. From 2001 to 2005, personal income
fell from 86% of GDP to 82%. This suggests that while it is possible for GDP
growth to continue to outpace personal income growth for a few more years, at most,
in the long run, the two growth rates should even out. Whether median household
income can keep pace with mean household income in the future will depend
primarily on what happens to income inequality. If inequality continues to widen, as
it has in recent decades, mean income will probably rise more quickly than median¹²
income.
¹² For more information, see CRS Report RS20811, The Distribution of Income in the United
States, by Brian Cashell.

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Figure 4. Personal Income and Worker Compensation as a
Percentage of GDP, 1929-2005

90%

80%

70%DP
60% G
50%f
40%% o
9 3 4 3 9 4 4 9 4 9 4 9 7 4 9 8 4 9 4 9 9 4
1 92 1 9 1 9 1 94 1 9 1 95 1 95 1 96 1 96 1 9 1 97 1 9 1 98 1 99 1 9 2 00
personal income/GDPcompensation/GDP
^Source:^C^R^S^cal^cu^l^a^tⁱ^oⁿ^s^bas^e^{d on}^dat^a^f^r^om^Bu^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^.
Figure 4 also demonstrates that worker compensation has been a relatively
constant share of GDP since 1970, with a slight decline in recent years. Economists
attribute the low growth rate of worker compensation in recent years to the weakness
of the labor market during and after the 2001 recession. In a situation where jobs are
scarce, workers’ bargaining power in wage negotiations tends to diminish. Recently,
the labor market has strengthened, which, in the short term, suggests that
compensation may rise more rapidly.
Within personal income, the trends seen over the past five years are likely to
become magnified in the future under current policy. The main story over the past
five years has been high rates of growth in benefits and transfer payments, balanced
by stagnant wages and capital income. (Interest rates have already begun to rise, so
the decline in capital income, caused by falling interest and rental income, may soon
reverse.) With the retirement of the baby boomers, entitlement and pension spending
is projected to continue its rapid rise. Furthermore, the rapid rise in medical costs has
been a persistent story in recent decades. Coupled with an aging population, rising
medical costs could make the rapid rise in benefits and transfer payments more
pronounced in future years unless policymakers and innovation within the private
sector can find ways to restrain it.¹³ The tradeoff between growth in transfers and the
decline in other income categories is likely to become more explicit in the future if
the transfers are financed through higher taxes or lower government spending, rather
than larger deficits. If the growth in personal income continues to be concentrated
in benefits and transfer payments, it is likely to raise equity issues among individuals
who are not recipients, such as the young and those without health insurance. A
¹³ For a detailed discussion, see CRS Report RL32747, Social Security and Medicare: The
Economic Implications of Current Policy, by Marc Labonte.

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further potential source of contention could arise if individuals perceive, perhaps
unfairly, that rising benefit costs are not being matched with commensurate quality
improvements. If this is the case, economic theory’s prediction that workers would
be indifferent between receiving compensation gains in the form of wages or benefits
might not hold.
Conclusion
Economists use many different statistics to evaluate economic well-being. Two
of them, GDP and household income, have moved in opposite directions in recent
years. GDP has grown at a healthy pace from 2003 onward, but household income
has declined slightly since 2000. This report has sought to reconcile the diverging
movements in the two measurements.
By converting GDP into the BEA’s measurement of personal income, and then
measuring personal income on a per household basis, most of the divergence can be
eliminated. While GDP grew at 2.6% annually from 2001 to 2005, real personal
income per household grew 0.1% annually during that period. The main causes of
the difference are the rapid rises in indirect and corporate taxes, capital depreciation,
and undistributed corporate profits. All three of these items are included in GDP but
not personal income. The remaining difference is accounted for by the more rapid
inflation in consumer goods than overall inflation, statistical discrepancy, and the
conversion to a per household basis.
Although the annual growth rate in real personal income per household from
2001-2005 was low, it still exceeded the growth rate of the Census’s measure of
mean household income, -0.4%. (Median household income, which is less directly
comparable, fell at about the same pace as mean income during that period.) Part of
the difference can be accounted for because personal income includes non-cash
benefits, which have grown rapidly in recent years, whereas household income does
not. When non-cash benefits are excluded, the annual growth rates of wages and
BEA’s personal income (both -0.4%) were equal to Census’s mean household
income from 2001 to 2005. Both data sources tell the same general story — despite
rapid economic growth from 2003 to 2005, the average household is not much better
off today than at the end of the last expansion, and the improvements seen have come
mostly in non-cash form.
Some popular explanations for why income growth is lagging GDP growth
include globalization, inequality, and more competitive labor markets. These
explanations are unlikely to be sufficient because both income measures include
capital income. Furthermore, the divergence between income growth and GDP
growth is also found in mean-income data, which include high-income individuals.
Personal income gains in recent years have been concentrated mostly in benefits
and transfer payments, whereas labor and capital income have stagnated. With an
aging population and rising medical costs, this is a trend that could easily continue
in the absence of policy changes