Are better times coming for U.S. middle-income households?

Income growth for middle-income households in the United States hasn’t been stellar in recent years. The income for the median household, or the household in the exact middle of the income spectrum, in 2011 (the last year for which complete data are available) was below its 2007 level, according to the Congressional Budget Office. While this outright decline is a result of the Great Recession of 2007-2009, the trend has been evident for several decades now. Growth in median income has been much slower since 1973 then it was during the 25 years or so before the period right after World War II. But could we be entering a new period of moderately higher growth for middle-income households?

A recent research note from Goldman Sachs’s chief economist, Jan Hatzius, argues that the future for the growth in median incomes looks somewhat bright. In the short term, the ongoing economic recovery should help. And when it comes to long-term trends, Hatzius makes an optimistic case that several underlying factors that in the past have resulted in income growth that is slower than overall economic growth are now set to reverse.

Hatzius breaks down the slow growth of median incomes from 1973 to 2013 into three major factors (there’s a fourth technical and relatively less important factor in his analysis).

The first of these is a decline in the ratio of household income to GDP, which is pretty much synonymous with a declining labor share of income. The declining share of income going to labor reduced the amount of income that could go to middle-income households. Hatzius projects that the ongoing U.S. labor market recovery will increase wage growth and shift income back toward labor income and away from profits. But given the structural factors that drove the decline in labor share in the first place, a stronger labor market might not be able to arrest the decline.

The second factor is increasing income inequality, measured by the ratio of the median income to the average income. If the average is increasing faster than the median, then the incomes of those households at the top of the income ladder are growing faster than those at the middle, which means inequality is still rising. Hatzius points to evidence that the ratio of household income at the top 10 percent of the income ladder to the median income seems to have leveled off over the past 10 years. But of course, over that same time period of time the share of income going to the top 1 percent of earners increased as well. Whether or not these trends will continue is up for debate. Hatzius doesn’t seem to have a hypothesis for exactly what may drive inequality in the future.

And the final factor is productivity growth. Here Hatzius is unsure about its future path, calling it a “wild card.” But he does cite evidence that some of the recent weakness in productivity growth is due to a lack of capital spending in recent years. This would imply that the current weakness is a result of the slow economic recovery since 2009—and that capital spending may pick up in the future.

But even after making his optimistic case for median income growth, Hatzius predicts that median household income growth will increase to only 1 to 1.5 percent a year in the next few years, compared to a 0.2 percent annualized rate from 1973 to 2013. Such an increase would be welcome news for middle-income households, but it would still be half of the 3 percent rate registered in the postwar era into the early 1970s. So even a relatively sunny future is not so bright compared to past performance.