Abstract
This paper first highlights the extent to which national income per head will be unreliable as an indicator of household income change over time around the middle for rich countries, in the short or long run, and will mislead as to the relative performance of countries in achieving broadly-based improvements in prosperity. It then demonstrates that ‘inequality-adjusting’ national income will not suffice to bridge the gap. The divergence between the trajectory of median household income and GDP/GNI per capita is due to a variety of factors that themselves vary in significance across countries and over time, with the distribution of the gains from growth being only one. Median income thus needs to be accorded a central role alongside GDP per capita in both official monitoring of living standards and research on inclusive growth. Growth in median incomes will not be a reliable measure of what is happening to the incomes of the poor, though, so low incomes and poverty certainly need to be separately monitored and analysed: one cannot assume that growth that transmits to the middle is also going towards the bottom.
Highlights
The contrast between reasonably strong levels of aggregate economic growth over recent decades and stagnation in household incomes across much of the distribution in some rich countries, most notably the USA, has reinforced concerns about relying on growth in national income per capita as the core indication of economic performance and broadly-based prosperity
This begs the question to be addressed in this paper: do inequality-adjusted national income and median household income tell the same story about how household incomes and living standards evolve over time, at least in rich countries? Are they substitutes for one another as indicators, and if not, which is likely to come closer to reflecting what is happening to the real incomes of ‘ordinary’ or ‘typical’ households?
We show that inequalityadjusted national income growth would still rank countries rather differently to the median in terms of real income growth
Summary
The contrast between reasonably strong levels of aggregate economic growth over recent decades and stagnation in household incomes across much of the distribution in some rich countries, most notably the USA, has reinforced concerns about relying on growth in national income per capita as the core indication of economic performance and broadly-based prosperity. At the same time, Atkinson (2013) and Atkinson et al (2017) advocate assigning a central role to how the median of the household income distribution is evolving and seeing that as a core social indicator ( reflected in the LSE Growth Commission’s report, Aghion et al 2013). This begs the question to be addressed in this paper: do inequality-adjusted national income and median household income tell the same story about how household incomes and living standards evolve over time, at least in rich countries? We demonstrate that income growth in the lower reaches of the distribution need to be tracked alongside the median and conclude by summarising the implications for monitoring broadly-based prosperity
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