Should Income Analysts Adjust for Family Size?

August 24th, 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

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3 comments in reply to "Should Income Analysts Adjust for Family Size?"

  1. Jake says:

    Thanks for making this very important point since it reminds us of the need to go back to the purpose that economic statistics are supposed to serve when we are “reading” the statistics. If I am correct in my understanding that economics is the study of what choices are made among competing resource-based decisions, then family income statistics should be informing us about how family size choices are relating to changes in family-based resources. Adjusting family income for size may give us a picture of relative financial health of households but hides from view the resource-based choice that may be going on as to size, and the latter seems more important to society than the former.

  2. Jerry says:

    I’ve been seeing the “adjustment for family size” footnotes in CBO reports for years, and it always rubs me the wrong way. You touch upon some of the reasons for that.

    In this CBO link, , the CBO ranks households into income groups after adjusting for family size. So a family of 4 (2 adults, 2 kids) making $80,000 becomes the equivalent of a single person with $40,000 (or something like that). This is bizarre to me. Wouldn’t it create all sorts of misleading assumptions? What if a billionaire has 1,000 kids? Does he suddenly shrink down into a single person who makes a much less amount of money?

    Kids cost money to raise. Dept of Agriculture says about $250k to raise a child to 18 years of age. And adults cost money to care for as they age and die. A single person who makes $40,000 a year still needs hundreds of thousands of dollars to retire comfortably.

    I just don’t see why quality of life/shared resource considerations should factor into CBO reports like the one I linked to. It even bizarrely factors into page 7 of the report, which measures how much households pay in and take out of federal taxes.

  3. Arnob Alam says:

    The adjustment you describe is in the wrong direction. As households grow larger, resources between household members can be shared. For example, heating costs for a household of four people is not twice that as the heating costs of a household of two people. Things like TV/entertainment can be shared by multiple members of the household.

    Household incomes are adjusted up to reflect this fact. That is, a household’s equivalent income goes up as the size of the household goes up. For details see the OECD or Luxembourg Income Study website.