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A superb article, a real eye-opener to layman like me. Congrats on the PhD!

My friend asked the question of capital gains and how it relates to the income growth of the middle 60% compared to the top 20%. Is capital gains calculated in the income numbers? If it is not, then does it distort the graphs conclusions?

No, capital gains are not included in the defintion of total money income, nor are survey respondents asked about it (in the CPS). I stuck with the same definition of income used for the "flatline" claim, for obvious reasons: total money income; then I controlled for potential variations in hours worked per household.

There is some info on capital gains by income group (for a single year) at the following link, but there's no indication of how much it changed over time for any of the groups -- let alone for the comparison of 2007 vs 2000. Here's the link: http://bit.ly/qZEj4I

I agree that the "class warfare" talk should be shelved for the time being in lieu of some more important issues. However, I think your notion of income equality is somewhat moot if capital gains doesn't come into the argument. The current discussion in Washington has focused on how to fairly structure taxes. The argument is not about what percent of income gained from "work" has each class taken home, it's about overall income. I haven't taken the time to look at the numbers, but I'm guessing that if capital gains were added into "income" that would turn the numbers on their head. I'm not saying that's necessarily a bad thing, but that the tax structure influences more things than just take home pay - like the price of equities in the stock market which usually benefits the 'rich' more than the 'middle class'. Also, I didn't notice if that was pre-tax income or take home pay, which also may skew the results. Anyways, thanks for the great thoughts - cheers.

Anthony,

Thanks for your comments. I agree that capital gains is important, but I had to limit the analysis to the income categories collected in the CPS, because that's what the middle-class "flatline" claim was based on. Income per FTE is closely correlated with wages, and has the advantage of removing the effects of changes in workers per household, and changes in hours worked per year per worker. (BTW, according to one paper by a U.S. Treasury employee, there are seventeen possible definitions of "income" available from the various statistics collected in the survey.)

If capital gains were included in the analysis, it would of course illustrate that most capital gains accrue to the top third -- but it's anybody's guess whether or how it changed, 2007 vs 2000. In any case, it's not captured in the CPS data.

Bottom line: the CPS data was the source for the claim -- an administration official confirmed that to me in an email. The same CPS data was used to analyze whether the median was in fact an accurate proxy for several plausible definitions of "middle class"; the result was negative.

If Wages/FTE increased for middle income people, was that because Wages increased or because FTE's (people employed in the household) went *down*?

Income per FTE is shorthand for income per 2080 hours worked. It controls for increases or decreases in hours worked per household, regardless of the reason the hours worked may have changed (eg, retirements, layoffs, extra workforce entrants, switches from part time to full time, etc).

In short, it isolates the money income return to a range of households for a given amount of work output from that same range of households. For example, if a two-FTE-earner married couple gets a divorce, (a) income per household would drop dramatically, but (b) income per FTE would remain the same. Conversely, if a single-earner household changed to two earners, income per household would increase while income per FTE would remain the same.

Thanks for clarifying the definition of FTE. What I'm wondering about is how the increases in Wages/FTE you observed during the 2000's were attributable to increases in Wages or to decreases in FTE.

FTE's increased in all quintiles (2007 vs 2000), so it was due to an increase in salaries and wages that exceeded the increase in FTE's.

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