An obvious, but overlooked reason for declining household income: the number of work hours per US household has been falling

From Mark Perry.

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In a recent CD post (“Have changing household composition and retirement caused the decline in median household income?“), I suggested that the decline in US median household income since around the turn of the century can be largely explained by demographic factors including: a) the significant increase in retired Americans as a share of the US adult population, and b) the changing composition of US households that increasingly includes more no-earner and single-earner households and fewer married and two-or-more-earner households. It’s an important point that most of the discussions and hand-wringing about declining US median household incomes completely ignore the demographic realities that the composition of American households is not static. US households in 2013 are significantly different from US households in 2000 in important ways (size, age, number of earners, hours worked, etc.) that affect household income, so we can’t accurately compare the $51,939 in median household income in 2013 to the much higher peak of $56,895 in median household income in 1999 (both median incomes are expressed in 2013 dollars).

In a recent Real Clear Markets op-ed (“The Obvious Reason for the Decline In Median Income”), economist Jeffrey Dorfman points out another very important demographic change that has significantly contributed to the decline in real median household income in the US over the last decade: the average number of hours worked per US household has been declining. So we would naturally and logically expect median and mean household incomes to decrease when average household work hours are falling. Here’s the opening of Jeffrey’s article:

Much has been made recently of the fact that real median household income has been stagnant over the past twenty years and falling for the past seven. While there are many problems with using median household income as a measure of the economic health of the middle class, it is still important to examine what is causing this middle-income stall. A major, and overlooked, part of the answer appears to be quite simple: Americans are working less.

As I pointed out previously (and as Jeff points out in his article), there’s been a significant demographic shift (along with the economic effects of the Great Recession) that has resulted in both smaller average households over time and a smaller percentage of Americans working in recent years, so that the average number of work hours per US household has naturally declined. And therefore, the very obvious, but overlooked conclusion reached by Dorfman is that: “When people and families work fewer hours, they earn less money.”

Following a procedure outlined by Dorfman in his article but using a slightly different dataset, the top chart above shows the relationship over time between annual US median household income (adjusted for inflation) and the average weekly work hours per US household in each year from 1980 to 2013. To calculate the average works per household, I used: a) the BLS series “Average Weekly Hours at Work in All Industries” (from Table 21 in this BLS report), b) the BLS series “Civilian Employment,” and c) the number of US households in each year from the US Census. Using the average weekly work hours and the number of Americans employed, the total number of hours worked annually were calculated and divided by the number of US households in each year to determine the average number of weekly work hours per household in each year from 1980 to 2013, and those values are represented by the red line in both charts above.

As can be seen in the top chart, the 8.7% decline in real US median household income between the 1999 peak ($56,895) and 2013 ($51,939) was accompanied by an even greater 9.25% decline in average household hours worked. As Dorfman points out, household work hours are calculated here and in his analysis as an average (mean) and not a median, “so it is not the perfect match to median household income, yet the insight revealed is still rather remarkable.” In fact, a simple linear regression reveals that almost 89% of the decline in median household income between 1999 and 2013 can be explained by the decline in average household work hours, so there is a very strong statistical relationship between median household income and average household hours worked, as expected.

The bottom chart above addresses the mis-match between median household income and average weekly household work hours by comparing average annual household income from 1980 to 2013 to the average number of work hours per US household. That chart shows that average household income has declined by 6% from the 2000 peak of $77,287 to $72,641 last year. During that same period, average weekly work hours per household declined by more than 10% from 48.3 to 43.3 hours. Like before, the results of a linear regression model show that 88% of the decline in average household income between 2000 and 2013 can be explained by the decline in average household work hours.

Further, about one-third of the 10.25% decline in average household work hours between 2000 and 2013 can be explained by the 3.1% decline in average household size during that time period from 2.62 to 2.54 persons. The remaining 7% of the decline in average household work hours since 2000 would be explained by other demographic changes including an aging US population with more Americans in retirement as a share of the population, and the shift towards more (fewer) single-earner (multiple earner) households. And there could also certainly be economic effects from the Great Recession that put downward pressure on average hours worked especially in 2008, 2009 and 2010, although that trend has reversed slightly in the last few years. There could also be a downward “Obamacare effect” on average hours worked that started in 2013 when many companies reduced workers’ hours below the 30-hour-per-week threshold to avoid the employer mandate to provide health insurance for full-time employees.
Here’s Jeffrey’s conclusion:

Middle class incomes are not growing as fast as most people would like because middle class families are working fewer hours. Possible policy prescriptions could include pro-business moves to increase hiring or pro-work moves such as making the social safety net somewhat less comfortable than it has become over the past five to ten years. Either way, it seems clear that the major problem restricting faster growth in household incomes is not income inequality, nor corporate greed, but a basic lack of people working.

And to that I would add that in addition to the economic factors that have contributed to a decline in average hours worked in recent years, e.g. involuntary part-time employment because workers can’t find full-time employment due in part to Obamacare, there are other important long-term demographic trends that can also explain declining household work hours and therefore declining household income. Specifically, the composition of US households is changing over time due to the natural consequences of an aging population and an increasing share of household with retirees, along with more (fewer) single-earner (multiple earner) households that reflects an ongoing trend of smaller US households dating back to at least WWII – and those factors can’t be ignored when discussing trends in US household income."