Federal fund rate, median income, and core inflation.

Here, I've added a graph of core inflation to the previous graph. While the correlation between median income growth and the federal funds rates is not perfect, it's far stronger than the correlation between the federal funds rate and inflation. In 1994-95, for example, the FFR doubled, even though inflation (already at a near 10-year low), dropped slightly.

Federal Funds Rate vs Median Household Income

Sustained drops in median income seem to be the rule rather than the exception. Once median income starts to fall, the drop seems to gather momentum and be hard to arrest, at least with monetary policy. What starts the drops? Is it policy or a natural cycle?


Here we have a graph of the federal funds rate against median income. While the graphs are not completely synchronized, their shapes are largely similar. While median income rises, the Federal Funds Rate increases. When median income falls, the Federal Funds rate also falls. The exception to this pattern is 1995-1998, when the Fed allowed median income to rise without responded with interest rate increases. Perhaps not coincidentally, that was the longest period of sustained income growth covered by this data series.

inequality increases, recession vs non-recession

Following up on that last post, depending on how you calculate it, the convergence between median family income and per capita GDP since 1984 occurs either completely or predominantly during the median income drops that surround recognized recessions.

Arithmetically, the difference between median family and per capita income dropped by $14,500 between 1984 and 2012. $14,500 of that change was associated with recessions.

Geometrically, per capita GDP increased 61% from '84 to '12. Median income increased by 8.1%. Between median income recessions, per capita income outpaced median income 43% to 30%, significant but not startling. During median income recessions, per capita income increased 12%. Median income dropped 17%.

By the way, I realize that per capita GDP and median household income measure slightly different things. Average household size, for example, decreased by about 7% over this time period, which would explain some of the difference in non-recession growth. There are, no doubt, other corrections to the baseline trends that explain some differences in growth rates without corresponding increases in inequality.

It seems unlikely, however, that those trends are related to economic cycles. It's hard to believe that average family sizes dropped 8% from 2007 to 2012, or that benefits increased about 15% from 1999-2004 to compensate for the drop in median income. And to the extent that those trends explain the baseline, non-recession convergence of the curves, it only further emphasizes the role of recessions in increasing inequality.

It hasn't always been this way. Prior to 1980, per capita GDP and median household income tracked one another very closely.

more fun with graphs

Median incomes decline before a recession, and continue to decline after the recession is over. What about per capita incomes?



Average incomes drop less steeply, for a shorter time.

It appears, in fact, that the median income drops surrounding recessions account for much of the rise in income inequality over the past thirty years. During full recovery periods (where median income is rising), the curves in the graph track fairly well. During recessions (broadly defined), the curves diverge.

median income drops presage recessions

For the last three recessions, median income started dropping prior to the official recession and continued to drop long after the recession officially ended. In the 1990 recession, median incomes dropped for four years. In the 2001 recession, they dropped for five. Around 2009, they dropped for six.

The fascinating thing, to me anyway, is that median incomes dropped prior to the recessions, that from the perspective of the median family, the recession started years before being recognized by official statistics. Subject to the normal caveats about correlation, causality, and small sample sizes, you might even say that median family income drops are reliable indicators of future recessions.
It's also interesting that while many are wondering why it's taken so long for incomes to recover, the time till income recovery doesn't look all that different from the previous recessions. The biggest difference isn't the length of time till income recovery started, but the amount of income lost. In addition, the severity of the initial income drop was associated with a shorter time gap between the income peak and the recession itself. By the time we hit a recession in 2001, incomes had already been falling for two years.