Center on Budget and Policy Priorities [Printer-friendly version]
January 26, 2006
INCOME INEQUALITY GREW ACROSS THE COUNTRY OVER THE PAST TWO DECADES
Early Signs Suggest Inequality Now Growing Again After Brief
Interruption
[Rachel's introduction: A prevention philosophy applied to the health
of U.S. citizens would focus on growing inequalities of income and
wealth. Numerous studies over the past 30 years have shown that
inequalities, social alienation, and a pyramid of hierarchies make
people especially susceptible to many diseases including cancer,
diabetes, arthritis and heart disease.]
In most states, the gap between the highest-income families and poor
and middle-income families grew significantly between the early 1980s
and the early 2000s, according to a new study by the Center on Budget
and Policy Priorities and the Economic Policy Institute. The study is
one of the few to examine income inequality at the state as well as
national level.
The incomes of the country's richest families have climbed
substantially over the past two decades, while middle- and lower-
income families have seen only modest increases. This trend is in
marked contrast to the broadly shared increases in prosperity between
World War II and the 1970s.
In addition, while income inequality declined following the bursting
of the stock and high-tech bubbles in 2000 -- both of which were quite
costly to the highest-income families -- early national-level data
suggest that inequality began growing again in 2003. Incomes at the
top have rebounded strongly from the stock market correction, while
the negative effects of the recent recession on lowand moderate-income
families have lasted longer than usual. Thus, it appears that the two-
decade-long trend of worsening income inequality has resumed.
The study is based on Census income data that have been adjusted to
account for inflation, the impact of federal taxes, and the cash value
of food stamps, subsidized school lunches, and housing vouchers.
Income from capital gains is also included. The study compares
combined data from 2001-2003 with data from the early 1980s and early
1990s, time periods chosen because they stand as comparable low points
of their respective business cycles. Its findings include:
** In 38 states, the incomes of the bottom fifth of families grew more
slowly than the incomes of the top fifth of families between the early
1980s and the early 2000s. In these 38 states, the incomes of the
richest grew by an average of $45,800 (62 percent), while the incomes
of the poorest grew by only $3,000 (21 percent) In other words, the
poorest families -- who saw an increase in purchasing power of only
$143 per year -- have not fared nearly as well as the richest families
during this period. In only one state -- Alaska -- did the incomes of
the low- income families grow faster than the incomes of the top
fifth.
** In 39 states, the incomes of the middle fifth of families grew more
slowly than the incomes of the top fifth of families between the early
1980s and the early 2000s. In no state did the income gap (degree of
income inequality) between middle- and high-income families narrow
during this period.
** Within the top fifth of families, the wealthiest families enjoyed
the highest income growth over the past two decades. In the 11 states
that are large enough to permit this calculation, the incomes of the
top 5 percent of families rose between 66 percent and 132 percent
during this period. This is faster than the income growth among the
top fifth of families as a whole in these states -- and much faster
than the income growth among the bottom fifth of families in these
states, which ranged from 11 percent to 24 percent.
** The five states with the largest income gap between the top and
bottom fifths of families are New York, Texas, Tennessee, Arizona, and
Florida. Generally, income gaps are larger in the Southeast and
Southwest and smaller in the Midwest, Great Plains, and Mountain
states. Income gaps tend to be larger in states where incomes in the
bottom fifth are below the national average, and to be smaller in
states where incomes in the bottom fifth are above the national
average.
** The five states with the largest income gaps between the top and
middle fifths of families are Texas, Kentucky, Florida, Arizona, and
Tennessee.
Income inequality increased rapidly during the 1980s. During the 1990s
exceptionally low unemployment produced relatively broad-based wage
growth during the latter part of the decade. This broad-based growth
ended with the 2001 economic downturn. Growth in real wages for low-
and moderate-income families began to slow and by 2003 wages began to
decline. Thus far, the recovery from the downturn has not been strong
enough to generate the kind of income gains among low- and middle-
income families seen in the late 1990s.
Growing Inequality Has Costly Consequences
"Growing income inequality harms this nation in a number of ways,"
stated Jared Bernstein, Senior Economist, Economic Policy Institute
and co-author of the report. "When income growth is concentrated at
the top of the income scale, the people at the bottom have a much
harder time lifting themselves out of poverty and giving their
children a decent start in life."
"A fundamental principle of our economic system is that the benefits
of economic growth will flow to those responsible for their creation.
When how fast your income grows depends on your position in the income
scale, this principle is violated. In that sense, today's
unprecedented gap between the growth of the typical family's income
and productivity is our most pressing economic problem."
States Can Partially Offset Trend Toward Larger Income Gaps
The biggest cause of rising income inequality over the past two
decades has been the erosion of wages for the 70 percent of workers
with less than a college education. That erosion, in turn, reflects
long periods of higher-than-average unemployment, globalization, the
shift from manufacturing jobs to low-wage service jobs, immigration,
the weakening of unions, and the decline in the minimum wage.
More recently, even college-educated workers have experienced real
declines in wages, in part because of offshore competition. While many
of these economic factors are largely outside the control of state
policymakers, "there's a lot that states can do to mitigate the
effects of increasing inequality," Elizabeth McNichol, Senior Fellow,
Center on Budget and Policy Priorities and co-author of the report
noted. Possible steps include raising the state minimum wage,
strengthening supports for low-income working families, and reforming
the unemployment insurance system. In addition, states can pursue tax
policies that partially offset the growing inequality of pre-tax
incomes.
TABLE A: TOP TEN STATES FOR SELECTED INCOME INEQUALITY MEASURES
Greatest Income Inequality Between the Top and the Bottom, Early 2000s
1. New York
2. Texas
3. Tennessee
4. Arizona
5. Florida
6. California
7. Louisiana
8. Kentucky
9. New Jersey
10. North Carolina
Greatest Income Inequality Between the Top and the Middle, Early 2000s
1. Texas
2. Kentucky
3. Florida
4. Arizona
5. Tennessee
6. New York
7. Pennsylvania
8. North Carolina
9. New Mexico
10. California
Greatest Increases in Income Inequality Between the Top and the
Bottom, Early 1980s to Early 2000s
1. Arizona
2. New York
3. Massachusetts
4. Tennessee
5. New Jersey
6. West Virginia
7. Connecticut
8. Hawaii
9. Kentucky
10. South Carolina
Greatest Increases in Income Inequality Between the Top and the
Middle, Early 1980s to Early 2000s
1. Kentucky
2. Pennsylvania
3. West Virginia
4. Indiana
5. Hawaii
6. Texas
7. Tennessee
8. North Carolina
9. Arizona
10. New York
Greatest Increases in Income Inequality Between the Top and the
Bottom, Early 1990s to Early 2000s
1. Tennessee
2. Connecticut
3. Washington
4. North Carolina
5. Utah
6. Texas
7. West Virginia
8. Pennsylvania
9. Florida
10. Maine
Greatest Increases in Income Inequality Between the Top and the
Middle, Early 1990s to Early 2000s
1. Kentucky
2. Pennsylvania
3. North Carolina
4. Indiana
5. Tennessee
6. Texas
7. West Virginia
8. Vermont
9. New Jersey
10. Connecticut
The Center on Budget and Policy Priorities is a nonprofit, nonpartisan
research organization and policy institute that conducts research and
analysis on a range of government policies and programs. The Economic
Policy Institute is a nonprofit, nonpartisan think tank that seeks to
broaden the public debate about strategies to achieve a prosperous and
fair economy.
Center on Budget and Policy Priorities
820 First Street NE, Suite 510
Washington, DC 20002
Tel: 202-408-1080 Fax: 202-408-1056
center@cbpp.org http://www.cbpp.org
Economic Policy Institute
1333 H Street NW, Suite 300
Washington, DC 20005
Tel: 202-775-8810 Fax: 202-775-0819
epi@epi.org http://www.epi.org