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Fairfax County Household Income:

Losing Ground as Future Income Inequality Grows
Terry Maynard
October 7, 2014

Introduction
In August, the Connection newspapers published an insightful article by Michael Lee Pope on
the varying growth rates of personal income in the last five years in northern Virginia. The
articles bottom line:
Paycheck growth in Fairfax County and the city of Alexandria are lagging behind the
state and the nation, according to data from the Bureau of Economic Analysis. A look at
per capita personal income from the last five years shows Northern Virginia struggling to
keep up as everybody else recovers from the recession.
Fairfax County had the lowest rate of growth, only 2 percent. Alexandria isn't much
better, showing a 3 percent growth in per capita personal income. Arlington has the
highest per capita personal income, although its growth is just under the state and
national average. The only bright spot in Northern Virginia is Loudoun County, which has
seen a 15 percent rate of growth from 2008 to 2012 (the most recent year available). For
the most part, Northern Virginia is stuck. . . .


Not a pretty picture if you live in Fairfax County. Moreover, it raises questions about whether
this situation is different over a longer timeframe and what we might expect in the future. So we
took a look at household income data and some expert forecasts for the decades ahead.


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Looking at the Data
In the process of looking at the data, we made two significant adjustments to the Connection
article. First, we looked at household income vice per capita income because the household
usually a nuclear family, but also an extended family, roommates, etc.--is the basic economic
unit of our society. Second, we addressed income on a real, that is, inflation-adjusted dollars
using the CPI-U-RS. Deflating nominal incomes by the extent of inflation provides a clearer
picture of spending power of the typical household/family over a longer timeframe.
A look at US Bureau of Labor Statistics (BLS) data on real (or constant 2012 dollars)
household income over the 27-year period from 1985 to 2012 provides some context for
examining real household income growth. For Fairfax County, its annual Fairfax County
Demographic Report provides insight into the median (50
th
percentile) income of county
residents.
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The following figure displays the changes in national real household income by quintiles and
Fairfax County median incomes over the timeframe:


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In general, Restons real household income runs slightly below the County average over time, typically not more
than three percent. In part this is due to implementing Restons vision that the community provide housing for all
incomes and ages. It also reflects a reality that the highest income Fairfax County households generally prefer to
live in enclaves, such as Great Falls.
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Looking just at the end points1985 and 2012more clearly shows the comparative winners
and losers in real household income growth over the period:

Here are some observations about the data:
Those with higher incomes nationally have seen their incomes grow much more rapidly
in real terms than their lower earning counterparts at every level of income.
With a County median income at the 80
th
percentile or better of national incomes, Fairfax
County households generally earn double the national median real household income.
More surprising is the fact that the real median household income in Fairfax County is
virtually unchanged over the period, growing only one percent since 1985 (or 4/100ths of
a percent per year) while the national median household income nationally has grown
about six percent since 1985. In fact, the growth rate for Fairfax household incomes is
lower than that experienced by the lowest quintile nationally since 1985.

1985
Income
2012
Income
Percent
Change
Average Annual
Growth Rate
Average Change
per Year
20th Percentile $20,230 $20,599 1.8% 0.07% $13.67
40th Percentile $38,063 $39,764 4.5% 0.16% $63.01
50th Percentile (Median) $48,063 $51,017 6.1% 0.22% $109.41
60th Percentile $58,964 $64,582 9.5% 0.34% $208.07
80th Percentile $88,681 $104,096 17.4% 0.60% $570.91
95th Percentile $146,528 $191,156 30.5% 0.99% $1,652.88
Fairfax County (Median) $106,049 $107,096 1.0% 0.04% $38.80
FC MHHI Percentile Rank 84.5% 80.5% -4.7% -0.18% -0.15%
Sources: US Bureau of Labor Statistics, Table H-1: Income Limits for Each Fifth and Top 5 Percent of All Households:
1967 to 2012, 2012 Dollars. Fairfax County Annual Demographic Report. The current income results reported there are
adjusted to 2012 dollars using US BLS' inflation calculator (CPI-U-RS).
Change in Real Median/Quintile Household Income, 1985-2012
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Fairfax County household incomes are, on average, not just stuck in neutral, they are
losing ground to virtually all households in the country. Overall, the slippage has been
from about the 85
th
percentile to just above the 80
th
percentile in the 27 years of
available comparable data.
But what about the future?
First, we need to consider to what extent we can expect the past serves as prologue, especially
in our rather special regional economy and Fairfax County in particular. In fact, we envision little
change in the core regional income trends observed over the past four decades:
a further growing gap between high- and low-income households,
continuing small pay raises for federal, state, & local government employees and their
retirees that barely keep pace with the cost of living,
continuing intermittent Congressional dysfunction (sequestration, shutting down the
government), focusing cuts on programs important to the local economysuch as
defense and homeland security--or otherwise limiting federal spending, and
a state legislature that is stymied by conservative down state legislators, impeding
needed infrastructure and social investment in northern Virginia.
There has been a growing recognition of the impact of government dysfunction on the areas
economy. Nearly a year ago, Robert Powel wrote Fairfax County feels the Effects of
Washingtons Blunders in Virginia Business. Last month, Mark Holan at the Washington
Business Journal reported on GMU CRA Professor Stephen Fullers presentation to the mid-
year Center regional update and forecast. Holan writes:
We started out this year worse than we thought and have performed worse than
expected, Fuller said in advance of early delivering the Center for Regional
Analysis' mid-year review and forecast for 2015 on Aug. 20 at the Capital One
Financial Corp. headquarters in McLean. Its more negative than people realize.
. . .
Everybody is doing better than we are, Fuller said. We are not doing well.
Drilling down to the type of jobs added or lost since last summer reveals a
problem that Fuller has been talking about for a while. More low-paying retail
and hospitality jobs are being added while federal government employment
shrinks and private sector business and professional services tread water.
Moreover, there is little evidence that the government will play a substantially different role in
Fairfax Countys economy in the years ahead. The role of government employment in the
County has changed little, slipping from 22% to 21% since 2002 according to the US Census
American Community Survey. That one percentage point shift has largely gone to private
sector employer-based jobs which have seen an increase of about one percent over the same
timeframe to 72% as the County job market has grown. While not all those jobs go to Fairfax
residents, we suspect the shares are little different in other beltway suburban Washington-area
counties with government employment much higher in Washington, DC.
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In a similar way, we expect federal contracts are likely to continue to be an important contributor
to the County economy and Fairfax household incomes, probably plagued by the same
intermittent governmental dysfunctions we have already seen.
Immigrations Impact on Fairfax County in the Last Decade
One factor that may change is the significant drag on recent Fairfax County
median income growth caused by the tremendous influx of foreign-born
households in the County in the 2000-2009 period, a trend that appears to be
subsiding. During the last decade, the arrival of foreign-born persons accounted
for all the net population gain in the County and more than 90% of the gain in
households. Nonetheless, County median household income grew at its fastest
pace from 2000-2007, falling only with the Great Recession, as federal spending
locally jumped in the wake of 9/11 and multiple wars.
In the three years from 2010-2012, however, only about 3,000 foreign-born
persons per year (fewer than 500 households per year) settled in the County
and, as a group, they were more educated that prior tranches of immigrants to
the County. In general, these foreign-born households initially earn household
incomes that are about two-thirds the County median soon after they arrive in the
County, but US Census data show that foreign-born households experience
significant real household income growth over the years.

Nonetheless, the large cohort of immigrant households in the last decade was a
substantial drag on the growth of median household income that is unlikely to
continue and the downward pressure of new foreign-born households on County
median household income will continue to subside over time as new immigrants
settle in areas with faster growing economies.

Subject Total
Foreign born;
Entered 2010
or later
Foreign born;
Entered 2000
to 2009
Foreign born;
Entered
before 2000
Foreign-born population 317,820 9,044 112,186 196,590
People per year 3,015 11,219 --
Percent of FC Population Increase 8.1% 100.2%
Foreign-born Households 121,018 1,355 30,108 89,555
Households per year 452 3011 --
Percent of FC HH Increase 10.1% 91.3%
Median Household Income (2012 Dollars)
Fairfax County $107,096
FC foreign-born households $85,277 $71,838 $70,607 $91,968
Percent of Median FC HHI 79.6% 67.1% 65.9% 85.9%
Bachelor's or advanced degree 45.5% 54.0% 46.8% 44.7%
Sources: 2012 5-Year American Community Survey, Fairfax County Demographic Information
The Role of Foreign-born Households in County Household Incomes
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Some Alternative Future Scenarios
To begin to understand how these characteristics will play out in the future, we need to make
some basic assumptions about the future of real US household income growth over the next
several decades. We have looked at four cases:
More of the same. A base case continuation of real household income growth as we
have experienced over the last 27 years (1985-2012). In general, that means median
household income will grow more rapidly in the rest of the countryalmost seven-fold--
than it will in Fairfax County, 0.28% annually nationwide vs. 0.04% annually in Fairfax
County.
The end of growth. Dr. Robert Gordon, Northwestern University, is famed for his
forecast of a very low-growth economy resulting in real per capita (not household, but it
will have to do) incomes growing on average about 0.20% annually for the next
generation. Thats about three-quarters the rate the nation has experienced over the
last 27 years, but still five times as fast as median household income has grown in
Fairfax.
Return to a higher longer term trend. Real median household income grew at a rate
of 0.39% per year from 1967-2012, according to BLS data using the CPI-U-RS
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index.
This rate is significantly higher than more recent real income increases and suggests a
more prosperous future for Americans. .
More education, better technology, more growth. Jan Hatzius, Goldman Sachs
Chief Economist, using an approach based on Gordons, is more optimistic, suggesting
that median household incomes could grow about 1.3% per yearmore than five times
the rate of the last quarter-century and 32X higher than Fairfax County has experienced
in that timeframe. (This Financial Times blog post by Gavyn Davies gives a good
overview of Hatzius forecast as well as Gordons.) Frankly, that forecast seems over
the top; its clearly the optimistic alternativealthough there are more optimistic ones.
Some Disturbing Results
So what happens to US real household incomes in these four cases if you look out three
decades? The tables attached to this paper show the arithmetic results of adjusting each of the
average annual growth rates (AAGR) in the historic growth rates experienced between 1985
and 2012. Two key trends appear likely.
Nationally, higher real household income growth leads to even greater income inequality.
The most obvious observation is the grotesque growth in the difference between the incomes of
the top five percent and the bottom 20 percent which is only exaggerated by rapid growth in the
economy. (See chart below.) If household income follows Hatzius growth projection and
nothing is done to prevent the already growing income inequality in our country, the income of

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Throughout we have used the CPI-U-RS inflation index (based on 2012 US dollars) so all the comparisons are
consistent. To see a discussion of this inflation index versus the CPI and the PCE, see Doug Shorts Median
Household Income Growth: Deflating the American Dream. Mr. Short, an advisor with Advisor Perspectives, a firm
advising investment advisors, provides an excellent series of articles examining economic, business, and
investment matters on his blog.
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the 95
th
percentile will be nearly 40 times that of families living on an income at the 20
th

percentile. With the much lower historic and end-of-growth rates, income inequality would
expand, but only moderately by comparison.

Meanwhile, real household income in Fairfax County is likely to continue to grow more
slowly than nationally, causing Cdounty median household income to slide in percentile
rank. Under all the scenarios, Fairfax Countys median household income continues to erode.
In the worst case, it erodes to 61% from 83% under the Hatzius rapid growth scenario, a one-
quarter loss in relative household income rank nationally at a near constant buying power.

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The ebbing of the median household income advantage experienced in Fairfax County will be
gradual if these forecasts are accurate, allowing public officials at all levels to take
countervailing action. Nonetheless, there is a possibility that the current cutting of well paying
federal jobs and growth of low-income jobs described by GMUs Fuller will make this decline
more severe than these national economy-based forecasts suggest. If the Countys real median
household income grows at the very slow pace forecast hereslower even than the growth of
income the lowest 20
th
percentile in all scenariosthe County (and probably the region) will
likely become less competitive in recruiting and retaining well-qualified knowledge workers
high technology and other professionals with advanced degrees.
The fact that the US government (and particularly the US Congress) is cutting federal
employment and is unwilling to provide the remaining federal employee salary increases
competitive with the private sector elsewhere will likely reinforce the trends forecast above. In
fact, the smaller federal workforce and the minimal federal pay increases are also likely to
temper regional private sector pay increases for comparable professional services while
knowledge centers elsewhere do not have the anchor of dominating federal salaries holding
back real income growth.
Conclusion
Although it is not a new observation, the prospect of growing household income inequality
nationally is cause for alarm, especially so since this analysis suggests the upper income levels
will benefit disproportionately the more rapidly median household incomes grow. Lower income
households will not receive a fair share of future household income gains, and the differentiation
grows with the growth rate in real household income. At worst, the trend could be politically
destablizing. Yet there is no evidence that the US Congress intends to take any action that may
forestall or at least constrain this outcome. Moreover, state and local elected officials are, so
far, generally looking the other way as well, and they have less leverage than Congress. The
obvous solutions involve higher taxespresumably higher income tax rates for high-income
householdsto (a) help the less affluent learn skills that will allow them to earn a higher income
and/or (b) provide a safety net for those who are unable to become higher income earners (or
even earn a living), and (c) simply provide decent jobs through national infrastructure and other
investment (and not going to war) for those seeking employment.
The national trend plus the reliance of Fairfax County (and, to a large extent, the entire
Washington metropolitan region) on federal employment and contracts bodes ill for the County.
Small household income gains will limit the growth of real property values, especially residential
properties as households neither have nor expect to have higher incomes, whose taxes are the
primary source of County revenues.
Moreover, slowed federal contract spending will continue to limit local hiring of high-paid
professionals while new technologies and business management thinking mean less space for
existing workers. The result will be a reduced need for County commercial office space, whose
vacancies now stand well above historic averages. This also results in lower commercial
property tax revenues now and into the future.
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The effect is and will continue to be a reduced ability of the County to invest in needed
infrastructure and servicestransportation, education, etc.and/or high property tax rates for
homeowners and businesses. The cycle tends to be self-reinforcing in the absence of an
outside infusion of capitaleither federal or stateor some other source of economic growth,
and none are foreseeable at the present time.
One can only wonder when our elected leaders at every level will recognize these disruptive
trends and take action to prevent the consequences this analysis suggests, nationally and
locally. Frankly, this writer is not optimistic that constructive action will be taken anytime soon in
the face of continuing divisive partisan politics and, in the end, it will be driven by an immediate
domestic economic or political crisis. In the meantime, Fairfax County will continue to bear the
brunt of meeting residents and businesses needs, which are likely to grow as real County
household incomes stagnate, especially in comparison with incomes elsewhere.


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Alternative Growth Scenarios, 2012-2045








2012 2015 2025 2035 2045 % Change CAGR
20th Percentile $20,599 $20,629 $20,727 $20,827 $20,927 1.6% 0.05%
40th Percentile $39,764 $39,902 $40,367 $40,836 $41,312 3.9% 0.12%
50th Percentile $51,017 $51,259 $52,075 $52,903 $53,745 5.3% 0.16%
60th Percentile $64,582 $65,050 $66,636 $68,261 $69,925 8.3% 0.24%
80th Percentile $104,096 $105,430 $110,000 $114,768 $119,743 15.0% 0.43%
95th Percentile $191,156 $195,238 $209,486 $224,773 $241,176 26.2% 0.71%
Fairfax County $107,096 $107,180 $107,459 $107,738 $108,019 0.9% 0.03%
"The End of Growth" (Gordon--0.20%/Yr):
Future Real Household Incomes by Quintiles & Median and Fairfax County Median, 2012-2045, 2012 Dollars
2012 2015 2025 2035 2045 % Change CAGR
20th Percentile $20,599 $20,640 $20,779 $20,919 $21,059 2.2% 0.07%
40th Percentile $39,764 $39,958 $40,610 $41,273 $41,947 5.5% 0.16%
50th Percentile $51,017 $51,356 $52,503 $53,676 $54,875 7.6% 0.22%
60th Percentile $64,582 $65,238 $67,475 $69,788 $72,180 11.8% 0.34%
80th Percentile $104,096 $105,966 $112,447 $119,323 $126,620 21.6% 0.60%
95th Percentile $191,156 $196,887 $217,262 $239,744 $264,553 38.4% 0.99%
Fairfax County $107,096 $107,213 $107,604 $107,996 $108,390 1.2% 0.04%
Recent Base Growth Case (More of the Same--0.28%/Yr):
Future Real Household Incomes by Quintiles and Median and Fairfax County Median, 2012-2045, 2012
Dollars
2012 2015 2025 2035 2045 % Change CAGR
20th Percentile $20,599 $20,657 $20,850 $21,046 $21,243 3.1% 0.09%
40th Percentile $39,764 $40,034 $40,947 $41,881 $42,836 7.7% 0.23%
50th Percentile $52,173 $52,657 $54,301 $55,997 $57,746 10.7% 0.31%
60th Percentile $64,582 $65,497 $68,644 $71,941 $75,396 16.7% 0.47%
80th Percentile $104,096 $106,707 $115,893 $125,870 $136,705 31.3% 0.83%
95th Percentile $191,156 $199,170 $228,389 $261,894 $300,315 57.1% 1.38%
Fairfax County $107,096 $107,259 $107,804 $108,352 $108,903 1.7% 0.05%
Return to Higher Long Term Growth Trend (0.39%/Yr):
Future Real Household Incomes by Quintiles & Median and Fairfax County Median, 2012-2045, 2012 Dollars
2012 2015 2025 2035 2045 % Change CAGR
20th Percentile $20,599 $20,792 $21,447 $22,124 $22,821 10.8% 0.31%
40th Percentile $39,764 $40,668 $43,835 $47,247 $50,926 28.1% 0.75%
50th Percentile $52,173 $53,797 $59,583 $65,991 $73,089 40.1% 1.03%
60th Percentile $64,582 $67,667 $79,054 $92,358 $107,901 67.1% 1.57%
80th Percentile $104,096 $112,969 $148,378 $194,887 $255,973 145.9% 2.76%
95th Percentile $191,156 $218,733 $342,767 $537,137 $841,727 340.3% 4.59%
Fairfax County $107,096 $107,640 $109,474 $111,338 $113,235 5.7% 0.17%
More Education, Better Technology, Greater Growth (Hatzius--1.3%/Yr):
Future Real Household Incomes by Quintiles & Median and Fairfax County Median, 2012-2045, 2012 Dollars