Abstract:
The U.S. has benefited from a long period of prosperity by and large beginning with the end of World War II. More recently, in constant dollars factoring in the impact of inflation, median household incomes have risen over 30% in the 40 years since 1967. But 40-year terms are for long-term thinkers. Most manufacturers and retailers have small groups in the company who think over that time frame, and much larger ones who are concerned with more short-term fluctuations.

A downturn in incomes of even a few years can play havoc with a premium brand. A short-term fall in real income can cause shoppers to desert a higher-priced retailer in droves, heading over to one of an ever increasing multitude of discount stores. And once a shopper gets a taste of lower prices, it can be very hard to win them back.

U.S. incomes have gone through several troughs over the past 40 years. Beginning in 1973, 1979, 1989, and 1999, real incomes fell, and on average took about seven years to recover each time. Currently, the U.S. is still in the income trough from the 1999 high, with declines beginning in the year 2000, bottoming out in 2004, and starting to edge back up since then, though still not back to 1999 levels.

Summary of findings:

• Reversing the trend seen most of this decade, median incomes in constant dollars in the U.S. have climbed the past two years. This year’s median trough is still below 1999 and 2000.
• Incomes are strongly skewed to the top end, with nearly one in three households making less than $30,000 per year. The top 20% of households earns 50% of the income.
• Future growth in incomes will be hard to come by as the large Baby Boom segment of the population retires and their incomes fall.
• This past year, full-time working women made $0.77 for each $1 made by men, up from 70% in 1991. Still, most of the growth in household income over the past 30 years can be attributed to growth in women’s incomes and their increasing participation in the labor force.
• The poverty rate fell slightly in 2006, though over 12% of the population— including over 17% of children—continue to live in poverty.

Full Article:
Beyond household composition, income is probably the most important demographic characteristic of consumers to fast moving consumer goods’ manufacturers and retailers. After all, the ability to sell products to consumers is predicated on their ability to buy, and unlike the market for luxury goods, most packaged goods are relatively inexpensive and appeal to consumers across a wide range of economic status, including the large share of U.S. households in the lower income ranges. Without at least some volume participation from the lower end of the income scale, it can be difficult to build the kind of large brand appeal that manufacturers seek.

Low prices are a driving force
The explosive growth of discount retailers over the past two decades demonstrates the powerful influence of lower income consumers. While it is true that consumers of all income ranges shop at discount retailers, dollar stores and supercenters, it is serving the need for low prices that all low-income consumers share that has been the core mission of powerful retailers like Wal-Mart and others.

Today, very low-income consumers (those below $20,000 in annual income) spend a larger share of their dollars at supercenters, dollars stores, and everyday low price (EDLP) retailers than they spend at conventional grocery stores. And this share would likely be much higher if the substantial share of lower income households who reside in densely populated urban areas with limited access to these store formats had ready access to these stores. Consider this: among low income heavy supercenter shoppers (those with good access to stores), nearly 50% of their total spending goes to supercenters.

Income inequality increases
After five straight years of declines, median incomes have risen for the past two years. This year’s median of $48,201 pushes the U.S. above the median of 2001 ($48,091), though still short of the all time highs of 1999 and 2000, when median household income rose above the $49,000 mark (expressed in constant 2006 dollars). The chart below shows how median income has changed in the U.S. over the past 40 years. Note the periods of decline and the recurring seven year cycle for recovery.

While median income is a good summary measure that can be easily compared across years, it is also important to understand the distribution of income. A median income of $48,201 means that half of all households make less money, and half make more. By aggregating across these two groups to create an average income for each, it is apparent just how strongly incomes are skewed in the U.S. The bottom half of all households averages just over $25,000 in annual incomes, while the top half averages nearly $108,000 – over 4.3 times as much.

Consider these facts:

• Nearly nine million households (8% of total U.S.) either have negative incomes or have incomes less than $10,000. Together, these households account for just 0.65% of all income dollars. Looking at the top end, it only takes the top 3,591 households to account for the same share of aggregate income. This top 0.0032% of U.S. households make more money than the bottom 8% combined – more than 250 times as much on a per household basis.
• Nearly 20% of households make less than $20,000 per year. Nearly 31% make less than $30,000.
• The bottom 51% of households (those making less than $50,000) earn less than 20% of total income dollars.
• The bottom 80% of households make about half the income dollars, leaving the second half of dollars to the top 20%.
  

Current demographic data suggest that the trend toward ever increasing levels of income concentration is likely to continue. The majority of population growth comes from immigrants, many of whom enter lower paying jobs in the service industries and in construction, agriculture and manufacturing. This serves to grow the lower end of the income distribution.

The golden years – Baby Boomers retire
As Baby Boomers begin to retire (Boomers are aged 44–62 in 2008), their source of income will shift and their level will fall. Additionally, as companies continue cost cutting measures, many Baby Boomers may find themselves out of work as highly paid management jobs are given to lower-paid younger workers. This will lead to declines in the proportion of population in the top earning ranges.

For this reason, it is important to analyze both the median income as well as the income distribution. With mandated growth in minimum wages, and as newly-arrived immigrants move up the seniority scale, median incomes will continue to grow. However, even if the median is rising, it is possible for the distribution of incomes to shift to the lower ranges. As manufacturers and retailers plan for the future, it will be essential to understand all facets of income in the U.S.

Incomes by household composition
Looking at income by household composition shows how the current income distribution will differentially impact the markets for different kinds of consumer products — large families, empty nesters, young singles, etc.

Income is clearly correlated with stage of life. Prime earning years are 35 to 54. Households with wage earners in these years will have the highest levels of income (Older Bustling Families, Established Couples, and Empty Nest Couples — see chart below). Households with younger wage earners, particularly those without children (Young Transitionals) will have lower incomes, on average 20% below the total U.S. level. Currently older singles—both under 65 (Independent Singles) and over (Senior Singles)— have the lowest incomes of all households, ranging 30–60% below average. Senior Couples tend to be younger than Senior Singles (and have two household members producing at least some income) and do better.

As the Baby Boom moves into post child / retirement household configurations, their incomes will also begin to fall as they rely more on assets and less on wages and salaries. This drag indicates that household incomes will stay stagnant or begin to fall over the next decade or so.

Although many Asian immigrants compete for the same lower-level jobs as other immigrants, a substantial share come ready to enter the burgeoning technology sector of the economy and leap past the typical immigrant pattern of starting in low-end jobs.

Incomes by gender
In 2006, a woman working full-time yearly earned an average salary about 77% of a man’s salary. This ratio was fairly constant for the two decades between 1960 and 1980, hovering around 60%. Women made up substantial earnings ground during the 1980s, however, raising the percentage to nearly 72% by 1990. Earnings for men remained flat and even declined in some years during the 80s as plant closings and layoffs tended to hit the more senior, higher paid (and mostly male) workers the hardest. In fact, median earnings in constant dollars for men have been flat, with small, short-term increases and decreases, since 1975. In the same period, median earnings for women have increased almost 30%. Most of the growth in real household income since 1960 can be attributed to increases in the number of women who work, and the growth in their earnings.

Part of the ongoing disparity in women’s and men’s earnings comes from stage in career. Current day 45 year olds were born in 1962 and were of college age in 1980, a time when men were more likely to attend college than women, and subsequently go on to more highly paid jobs. Historically, partly because of the disparity in education, and partly because of broader societal issues, women were often in lower paying jobs, or were simply paid less than male counterparts. Today, women are much more likely to attend college (currently the majority of college students are women), and the wage gap will continue to shrink over time.

Poverty
It is useful to examine poverty rates in addition to income because the criterion for poverty status varies by household composition. While an income of $40,000 might provide well for one or two persons, the same income for a household with two adults and five children will not stretch nearly as far. In many ways, the poverty rate, or an income to poverty ratio, is a better measure of income for marketers of packaged goods than income alone since it is a more accurate predictor of buying power. (The income to poverty ratio is the ratio of a household’s income to the poverty line for its household type.) An income to poverty ratio of 1.25 (income is 25% above the poverty line for the household type) is often used to determine eligibility for various forms of government aid, and is perhaps a better measure of how many households are truly struggling to make ends meet. Using an income to poverty ratio of 1.25:

• 16.8% of all persons fall below the poverty line
• 11.4% of non-Hispanic whites and 14.1% of Asians fall below
• 28.9% of Hispanics and 30.7% of blacks fall below
• 22.7%, more than one in five households with children, fall below the line
  

Poverty rates vary strongly by race and ethnicity. Only 8.2% of non-Hispanic whites and 10.3% of Asians were in poverty versus 20.6% for Hispanics and 24.3% for non-Hispanic blacks. While the poverty rate fell overall in 2006, it fell the most for Hispanics, dropping from 21.8% in 2005 to 20.6% in 2006. Given that nearly 60% of population growth in the U.S. comes from immigrants, the majority of whom are Hispanic, either some reasonable number of prior Hispanic immigrants or Hispanic citizens grew their incomes above the poverty line or a larger share of new immigrants found jobs that pay above the line (or some combination of both).

The poverty rate for children under the age of 18 was 17.4% in 2006. Most of these children in poverty are in families headed by single parents – the poverty rate for married couple families with children was 4.9% versus 13.2% for single parent families headed by a man, and 28.3% for single parent families headed by a woman. Of the families living in poverty, 62% are headed by a single parent.

Implications for marketers
As population growth continues to be fueled by immigrants and Baby Boomers begin to retire, we are likely headed for a period of declining incomes. Savvy marketers will take heed and deliver services and products that cater to consumers’ needs and preferences. Know your consumer target. Start with determining the right price, product and distribution method that delivers the most value to your consumers. Areas that are populated with a predominant ethnic influence need to factor unique cultural preferences into the marketing mix. Cater to the aging needs of Baby Boomers with products that ascribe to their evolving health care needs. And make it convenient and low cost. As families struggle to balance careers and family life, time and money are of the most needed.