GDP Per Capita Versus Median Household Income: What Gives Rise to the Divergence Over Time and how does this Vary Across OECD Countries?

• Published date: 01 September 2019
• Author: Brian Nolan,Max Roser,Stefan Thewissen
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/roiw.12362

GDP PER CAPITA VERSUS MEDIAN HOUSEHOLD INCOME: WHAT

GIVES RISE TO THE DIVERGENCE OVER TIME AND HOW DOES

THIS VARY ACROSS OECD COUNTRIES?

by Brian Nolan*, Max Roser and Stefan Thewissen

1

Institute for New Economic Thinking and Department of Social Policy and Intervention,

University of Oxford

Divergence between the evolution of GDP per capita and the income of a “typical” household as

measured in household surveys is giving rise to a range of serious concerns, especially in the USA.

This paper investigates the extent of that divergence and the factors that contribute to it across 27

OECD countries, using data from OECD National Accounts and the Luxembourg Income Study.

While GDP per capita has risen faster than median household income in most of these countries over

the period these data cover, the size of that divergence varied very substantially, with the USA a clear

outlier. The paper distinguishes a number of factors contributing to such a divergence, and finds wide

variation across countries in the impact of the various factors. Further, both the extent of that diver-

gence and the role of the various contributory factors vary widely over time for most of the countries

studied. These findings have serious implications for the monitoring and assessment of changes in

household incomes and living standards over time.

JEL Codes: D31, D60, E01

Keywords: economic growth, household incomes, inequality

1. Introduction

The evolution of GDP per head is widely taken to be the central indicator of a

countrys economic performance and success in improving living standards over

time (see e.g. Coyle, 2015; Gordon, 2016; Feldstein, 2017). This remains the case

despite increasing recognition of its limitations in those terms, as brought out com-

prehensively in the Stiglitz-Sen-Fitoussi Report (2009), and on-going efforts to

address those limitations by national statistics offices and the UN, OECD and EU.

There is increasing awareness that the evolution of average income at the national

level as measured in the national accounts may fail to capture the experience in liv-

ing standards of the “typical” household. It has therefore been proposed that

median household income, “equivalized” to take differences in household size into

account, should be used as a key indicator of changes in living standards (Aaberge

and Atkinson, 2013; Boarini et al., 2015; Thewissen et al., 2015; Nolan et al., 2016).

Incomes for the typical household, however, might not grow in tandem with

GDP. To drive home from the outset that this divergence really matters, one can

1

We aregrateful for very helpful comments from Facundo Alvaredo (ParisSchool of Economics),

Tony Atkinson (Nuffield), two anonymous referees, and participants at seminars and conference

presentations including APPAM,LSE, 2016, SASE, Berkeley 2016, and ECINEQ, New York, 2017.

*Correspondence to: Brian Nolan, INET and Department of Social Policy, University of

Oxford, Institute for New Economic Thinking, Eagle House, Walton Well Rd., Oxford Ox2 6ed,

UK (brian.nolan@spi.ox.ac.uk).

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C2018 International Association for Research in Income and Wealth

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Review of Income and Wealth

DOI: 10.1111/roiw.12362

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Series 65, Numb er 3, September 2019

point to the experience of the USA. Figure 1 (using definitions and sources to be

described below) illustrates the yawning gap between cumulative growth in GDP

per capita and in median equivalized household income (each in real terms) seen

there in recent years. The USA may not be representative, however, either in the

extent of this divergence or the mix of factors producing it; indeed, this paper will

demonstrate the very substantial heterogeneity across rich countries, and indeed

over different time-periods, in that regard.

Two reasons why the typical household might not benefit from economic growth

have featured prominently in the academic debate. First, GDP per capita is produced

in a national accounts framework whereas median household income is based on

household surveys, and a common picture of how income is evolving in aggregate may

not emerge because of mismeasurement or differences in income definitions. Organiza-

tions including the OECD and EU are devoting considerable analytical effort to

explore an internationally comparable methodology to produce distributional income

measures that are consistent with national accounts concepts and totals (Fesseau and

Matonetti, 2013; Fessau et al., 2013; OECD, 2013, 2015; European Commission,

2014a, b; Causa et al., 2015; Ribarsky et al., 2016). Empirical studies on this matter

tend to be comparative, showing that mean per capita income from national accounts

and household surveys can diverge substantially (e.g. Smeeding and Weinberg, 2001;

Bhalla, 2002; Deaton, 2005; T€

orm €

alehto, 2011; Endeweld and Alkemade, 2014; Atkin-

son et al., 2015; Pinkovskiy and Sala-i-Martin, 2016). Academic researchers are also

actively engaged in developing Distributional National Accounts (Pikettyet al., 2016).

The second reason attracting substantial attention is growing income

inequality: if most of the increase in national income goes to the top of the distri-

bution, the median will show little increase. Here, empirical studies in general are

country cases, mostly on the USA (see e.g. Fixler and Jaditz, 2002; Fixler and

Johnson, 2014, Jorgenson and Slesnick, 2014; Economic Report of the President,

2015; Fixler et al., 2017; see also Pessoa and Van Reenen, 2013, on the UK).

Figure 1. Growth in GDP per capita and median household equivalised income, USA from 1979

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Review of Income and Wealth, Series 65, Number 3, September 2019

[Colour figure can be viewed at wileyonlinelibrary.com]