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Introduction to U.S. Economy: Personal Income

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Updated November 14, 20162019 Introduction to U.S. Economy: Personal Income What Is Income? Table 1. Sources of Personal Income: 2015 is Income? Income is a measure of resources accruing to an individual over a period of time. In general, individuals receive income from their labor, assets, and government transfers. In its broadest terms, income is a measure of the maximum amount of goods and services an individual can consume in a given period without diminishing their net worth (the difference between their assets and liabilities) at the end of the period. Income is considered a flow variable as it is because it is measured over a period of time, in comparison to; in contrast, net worth, a a stock variable, which is measured at a given point in time. Measures of Income There are two prominent sources of data on personal income in the United States, the Bureau of Economic Analysis (BEA) and the Census Bureau. Although both agencies attempt to measure personal income, their definitions of income and how they collect data differ significantly. The BEA has a broader measure of income whichthat includes both money income (e.g., wages and salary) and non-moneynonmoney income (in-kind benefits such as employersponsored health care, housing, or meals). BEA data isare generally reported at the aggregate level (e.g., economywide, states, regions), but also offersoffer limited information at the individual level. Additionally, BEA collects income figures from both administrative data from federal agencies and federal agency administrative data and surveys. BEA also provides income data both before and after remittance of taxes and after tax remittances. Income data from BEA is available are available at http://www.bea.gov/iTable/index_nipa.cfm. In contrast to BEA, the Census Bureau’s measure of income includes only money income, while non-money; nonmoney income is not not included. The Census collects income data through surveys surveys at the household level, but also reports the data at the the individual and family level. The reason incomeIncome is often reported at the household or family level isbecause of the recognition that that individuals within a household or family generally share share resources and make economic decisions together. Households A household generally includesinclude all individuals that live at the the same address, while a family includes all individuals living living at the same address who are related to each other by birth, marriage, or adoption. The Census also offers data on the the distribution of income and poverty levels. Additionally, income measures from the Census generally reflect pre-taxpretax income. Income data from the Census Bureau isare available at at http://www.census.gov/topics/income-poverty/ income.html. Sources of Income Income is derived from a wide array of sources, including salaries and wages, business income, rental income, investment income (interest, dividends, etc.), and government transfers from a number of programs. Different definitions include different sources of incomesincome; Table 1 breaks income down into categories according to the BEA definition. Table 1. Sources of Personal Income: 2018 Percent of Total Income Employee Compensation 5861% Wages and Salary 4750% Supplements to Wages and Salaries 11% Business Income 89% Rental Income 4% Investment Income 1416% Government Transfers 1617% Social Security 5% Medicare 4% Medicaid 3% Unemployment Insurance <1% Veterans’ Benefits 1% Other 3% Source: CRS calculations using data from U.S. Department of Commerce, BEA, GDP and Personal Income, at httphttps://www.bea.gov/ iTable/index_nipa.cfmdata/ income-saving/personal-income. Note: Percentages may not add to 100% due to rounding. In general, the largest share of personal income is employee compensation, about 58% of all income in 2015. Wages and salaries account for about 81% of employee compensation and 19% is in the form of in-kind 61% of all income in 2018—of which about 81% is wages and salaries and 19% is in-kind transfers to employees. Business income accounts for about 8 9% of income, rental income accounts for about 4%, and investment income accounts for about 14% of income16%, as shown in Table 1. Transfers from the government, in the form of both money income and in-kind benefits, accounted for about 1617% of total income in 2015. Approximately one-third2018. About 31% of government transfers are from Social Security, 24% is from 23% are from Medicare, 21% is19% are from Medicaid, less than 1% is from are from unemployment insurance, 3% isare in the form of veterans’ benefits, and 18% is16% are from other programs. Earnings, a subset of income, are often reported alongside income measures. Earnings generally only include income derived from labor. The BEA’s measure of earnings includes wages and salarysalaries, supplements to wages and salaries, and business income, about 6670% of all personal income as shown in Table 1. However, the Census only includes wages and salaries, and self-employment/business income as earnings. https://crsreports.congress.gov Introduction to U.S. Economy: Personal Income Measuring Income over Time Individual incomes have grown significantly over time in the United States. According to the BEA, real aggregate https://crsreports.congress.gov Introduction to U.S. Economy: Personal Income income has increased in inflation-adjusted dollars from about $1.2 trillion990 billion in 1929 to about $15.517.8 trillion in 20152018, an increase of about 3.03% per year on average. However, average individual income, which accounts for population growth, grew by about 1.82.2% per year on average over the same period, as shown in Figure 1. According to Census data, real median family income has grown in inflation-adjusted terms from about $32,97035,015 in 1953 (the earliest data available) to about $70,697 in 201578,646 in 2018, an increase of about 1.23% per year on average. Differences in income growth between Census and BEA figures are due to differences in the level of analysis, the alternative income definitions used, and differences between average and median calculations. As shown in Figure 1, median family income grew quite rapidly between 1953 and 1969, an average growth rate of about 2.93.1% per year. However, between 1970 and 20152018 median family income growth has only been about 0.67% per year on average. And between 2000 and 2015 medianMedian family income growth has been nearly flat, increasing by about 0.1% per year on average. Both average (mean) and median are measures of central tendency, which means they provide a sense of the central or typical value within a distribution. For income measures, median is often preferred as it is less sensitive to outliers (extreme values at either end of a distribution) which are especially common at the upper end of the income distribution. accelerated since 2012, growing by about 2.4% each year on average. services within the economy over the course of an expansion, overall output and incomes tend to rise. As shown in Figure 1, median family incomes tend to rise and fall with the business cycle. However, in the long- term, economic growth is largely dependentdepends on growth in the productive capacity of the economy. Increaseseconomy’s productive capacity. In general, increases in the economy’s productive capacity generally lead to an increase in aggregate incomes over time. For a more detailed discussion of the connection between between economic growth and incomes, see CRS In Focus IF10408, Introduction to U.S. Economy: GDP and Economic Economic Growth. Income Distribution Economic growth is synonymous with growth in aggregate income, but this growth in income is not necessarily shared equally. The Census collects data on the distribution of income by quintile and for the top 5%. As shown in Table 2, about 51.152.0% of income in 20152018 went to households in the highest quintile (top 20%), and 3.1% of income went to households in the lowest quintile (bottom 20%). The top 5% of households received about 22.1% of aggregate income. Table 2. Income Distribution: 2015 Share of Aggregate Income by Percentile Mean Household Income of Percentiles Lowest quintile 3.1 $12,457 Second quintile 8.2 $32,631 Middle quintile 14.3 $56,832 Fourth quintile 23.2 $92,031 Highest quintile 51.1 $202,366 22.1 $350,870 Figure 1. Income Levels: 1929-2015 Of which: top 5 percent Source: U.S. Department of Commerce, BEA, GDP and Personal Income, at 23.1% of aggregate income. Both average (mean) and median are measures of central tendency, which means they provide a sense of the central or typical value within a distribution. For income measures, median is often preferred because it is less sensitive to outliers (extreme values at either end of a distribution), which are especially common at the upper end of the income distribution. Table 2. Income Distribution: 2018 Lowest quintile 3.1% $13,775 Figure 1. Income Levels: 1929-2018 Second quintile 8.3% $37,293 Middle quintile 14.1% $63,572 Fourth quintile 22.6% $101,570 Highest quintile 52.0% $233,895 23.1% $416,520 Percentage Share of Aggregate Income Of which: top 5 percent Mean Family Income of Percentiles Source: U.S. Department of Commerce, Census Bureau, Historical Income Tables: Households, https://www.census.gov/data/tables/timeseries/demo/income-poverty/historical-income-households.html. Source: U.S. Department of Commerce, BEA, GDP and Personal Income, http://www.bea.gov/iTable/index_nipa.cfm, and U.S. Department of Commerce, Census Bureau, Historical Income Tables: Families, at httphttps://www.census.gov/data/tables/time-series/demo/ income-poverty/historical-income-families.html. Note: Adjusted for inflationMeasured in constant 2018 dollars. Grey bars represent recessions as defined by the National Bureau of Economic Research. Determinants of Income Growth Economic growth (as measured by gross domestic product (GDP)[GDP]) generally results in the growth of aggregate income. For example, between 1929 and 2015 real GDP grew at about 3.2% per year on average, while aggregate personal income grew at about 3.0% per year on average. In the short-In the short term, economic growth, and therefore income growth, is largely dependentdepends on the level of aggregate demand in the economy. As individuals demand more goods and services Source: U.S. Department of Commerce, Census Bureau, Income and Poverty in the United States: 2015, at http://www.census.gov/data/ tables/2016/demo/income-poverty/p60-256.html. Over time, the The share of income going to the highest quintile of of households has been steadily rising since the Census began began collecting this data in 1967. The share of income going to the highest quintile rose by about 7.58.4 percentage points, increasing from about 43.6% in 1967 to 51.1% in 2015. The 52.0% in 2018. The share of income going to the rest of the income distribution distribution decreased over the same period. The share of income going to the lowest quintile decreased by about 0.9 percentage percentage points, the second quintile decreased by about 2.6 2.5 percentage points, the third quintile decreased by about 3.0 3.2 percentage points, and the fourth quintile decreased by about 1.06 percentage points. Jeffrey M. Stupak, Analyst in Macroeconomic Policy https://crsreports.congress.gov IF10501 Introduction to U.S. Economy: Personal Income Disclaimer This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material. https://crsreports.congress.gov | IF10501 · VERSION 2 · NEW3 · UPDATED