Should Income Analysts Adjust for Family Size?

Aug 24, 2012 at 7:59 pm

This sounds, and is, a bit weedy/wonky, but it’s a point that needs to be taken more seriously among economists, journalists, and policymakers who focus on trends in family income: it’s not necessarily correct to adjust incomes for family size, because family size is endogenous to economic conditions.

Let me explain that cryptic insight.

I thought about this upon hearing this Marketplace story on the way home tonight on how the tough economy—the kinds of trends I describe here—has put downward pressure on the birth rate.  It’s a well-known phenomenon—one determinant of family size is how families are doing economically in the present and expect to do in the future.  Sure, it’s an awfully rational calculus, and much of what goes into childbearing decisions is far from rational.  But research and experience, as the Marketplace segment reveals, is quite clear on this point.

Now, keeping that in mind, consider this: many economists believe you should adjust family income for family size because as families get smaller, e.g., the same amount of family income goes further.  A family of three with $60K has $20K per capita; a family of five with the same income has $12K per cap.

In practice, analysts often make size adjustments based on this type of thinking: sure, incomes have grown more slowly for most families in recent years, but they’re also smaller, so if you adjust for that, they’re not necessarily worse off.

But if shrinking family size is itself a factor of diminished income growth, then to adjust for it is to assume away at least part of what’s really going on here.  You’re taking something that makes families worse off—they’d rather have more kids but can’t afford it—and tweaking their income to make them look better off.

I don’t want to push this too far.  First, we’re not talking the Irish Potato Famine here, where birth rates plummeted.  Second, even if they’re psychically worse off, there really is more money to go around.  Third, as I said, family resources are but one factor that go into such decisions.  And fourth, smaller families are some people’s reasonable response to global resource constraints.

But economists should not blithely adjust for family size and assume all’s well.  At least some part of that smaller family may be a signal that all’s not well at all.

[Figure shows CBO data of real median family income size-adjusted and not adjusted.]

Source: CBO Household Income Data, Real Median Market Income

Print this post