Income inequality continues to grow; Pa. earns middling score on income gap

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The Economic Policy Institute, a liberal think tank funded in part by labor unions, on Nov. 15 released a study, “Pulling Apart: A State-by-state Analysis Of Income Trends.” The Center on Budget and Policy Priorities co-authored the report. The report’s executive summary finds:

A state-by-state examination finds that income inequality has grown in most parts of the country since the late 1970s. Over the past three business cycles prior to 2007, the incomes of the country’s highest-income households climbed substantially, while middle- and lower-income households saw only modest increases. As of the late 2000s (2008-2010, the most recent data available):
n In the United States as a whole, the poorest fifth of households had an average income of $20,510, while the top fifth had an average income of $164,490 — eight times as much. In 15 states, this top-to-bottom ratio exceeded 8.0. In the late 1970s, in contrast, no state had a top-to-bottom ratio exceeding 8.0.
n Nationally, the average income of the richest fifth of households was 2.7 times that of the middle fifth. The five states with the largest such gaps are New Mexico, California, Georgia, Mississippi, and Arizona.

Gaps separating high-income households from others grew prior to recession

The long-standing trend of growing income inequality continued between the late 1990s and the mid-2000s.

  • On average, incomes fell by close to 6 percent among the bottom fifth of households between the late 1990s and the mid-2000s, while rising by 8.6 percent among the top fifth. Incomes grew even faster — 14 percent — among the top 5 percent of households.
  • The average income of the top 5 percent of households was 13.3 times the average income of the bottom fifth. The states with the largest such gaps were Arizona, New Mexico, California, Georgia, and New York, where the ratio exceeded 15.0.

Similarly, income gaps between high- and middle-income households remain large.

In 45 states and the District of Columbia, average incomes grew more quickly among the top fifth of households than among the bottom fifth between the late 1990s and the mid-2000s. In no state did the bottom fifth grow significantly faster than the top fifth.

Similarly, households in the middle of the income distribution fell further behind upper-income households in most states between the late 1990s and the mid-2000s.

  • On average, incomes grew by just 1.2 percent among the middle fifth of households between the late 1990s and the mid-2000s, well below the 8.6 percent gain among the top fifth. Income disparities between the top and middle fifths increased significantly in 36 states and declined significantly in only one state (New Hampshire).

An examination of income trends over a longer period — from the late 1970s to the mid-2000s — shows that inequality increased across the country.

  • In every state plus the District of Columbia, incomes grew faster among the top fifth of households than the bottom fifth. Nationally, the richest fifth of households enjoyed larger average income gains in dollar terms each year ($2,550, after adjusting for inflation) than the poorest fifth experienced during the entire three decades ($1,330).
  • Middle-income households also lost ground compared to those at the top. In all 50 states plus the District of Columbia, the income gap between the average middle-income household and the average household in the richest fifth widened significantly over this period.

Top 5 percent of households pulling away even faster

  • The widening income gap is even more pronounced when one compares households in the top 5 percent of the income distribution to the bottom 20 percent over the last three decades. EPI conducted this part of its analysis for the 11 large states that have sufficient observations in the Current Population Survey to allow the comparison of the average income of the top 5 percent of households between different time periods. (These states are California, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, and Texas.)
  • In these 11 large states, the average income of the top 5 percent rose between the late 1970s and mid-2000s by more than $100,000, after adjusting for inflation. By contrast, the largest increase in average income for the bottom fifth of households in these states was only $5,620.
    n In the 11 states, the incomes of the top 5 percent of households increased by 85 percent to 162 percent between the late 1970s and mid-2000s. By contrast, incomes of the bottom fifth of households didn’t grow by more than 27 percent in any of these states, and in one state —Michigan — they actually fell.

The average income of the top 5 percent pulled away from those in the middle as well. In the late 1970s, the incomes of the top 5 percent were 2.5 to 3 times those of the middle fifth in these 11 states. By the 2000s they were more than 4 times as much in all 11 states.

Causes of rising inequality

  • Growth in wage inequality. The erosion weakness of wage growth for workers at the bottom and middle of the income scale reflects a variety of factors. Over the last 30 years, the nation has seen increasingly long periods of high unemployment, more intense competition from foreign firms, a shift in the mix of jobs from manufacturing to services, and advances in technology that have changed jobs. The share of workers in unions also fell significantly. At the same time, the share of the workforce made up of households headed by women — which tend to have lower incomes — has increased. Government policies such as the failure to maintain the real value of the minimum wage and to adequately fund supports for low-wage workers as well as changes to the tax code that favored the wealthy have also contributed to growing wage inequality.
  • Only in the later part of the 1990s did this picture improve modestly, as persistent low unemployment, an increase in the minimum wage, and rapid productivity growth fueled real wage gains at the bottom and middle of the income scale. Yet those few years of more broadly shared growth were insufficient to counteract the decades-long pattern of growing inequality. Today, inequality between low- and high-income households — and between middle- and high-income households — is greater than it was in the late 1970s or the late 1990s.
  • Government policies.
  • Government actions — and, in some cases, inaction — have contributed to the increase in wage and income inequality in most states. In addition, changes in federal, state, and local tax structures and benefit programs have, in many cases, accelerated the trend toward growing inequality emerging from the labor market.
  • Expansion of investment income.
  • Forms of income such as dividends, rent, interest, and capital gains, which primarily accrue to those at the top of the income structure, rose substantially as a share of total income during the 1990s. (Our analysis captures only a part of this growth, as we are not able to include capital gains income due to data limitations.) The large increase in corporate profits during the economic recovery after the 2001 recession also widened inequality by boosting investors’ incomes.

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