Tight labor markets and minimum-wage hikes in recent years may well have halted, at least temporarily, the rise in income inequality plaguing the U.S. economy. But as a new analysis of income data makes clear, the long-term trend toward greater income dispersion has hardly been affected.
In the late 1990s, report the Center on Budget & Policy Priorities and the Economic Policy Institute, the average pretax income of the top 20% of U.S. families was 10.6 times as large as that of the bottom 20% of families. Two decades ago, the multiple was just 7.4. And the average income of the top 5% of families has jumped to 18.3 times that of the bottom 20%, from 11 times as large in the late 1970s.
The 1990s were especially good to the top 20% and top 5% of families. During the decade, their average real incomes before taxes grew by $17,870 and $50,760 (1997 dollars), respectively, while those of the bottom and middle 20% of families edged up by only $100 and $780.
Since these numbers don't include capital gains, upper-income groups undoubtedly made out even better. On the other hand, most low-income families don't pay income taxes and many receive cash supplements via the earned income tax credit. Still, even on an aftertax basis, Congressional Budget Office projections indicate that the income gaps between poor and affluent families rose between 1989 and 1999.
As for individual states, two-thirds saw income gaps rise during the 1990s. Those with the greatest inequality (income ratios of over 11.5 between the top and bottom 20% of families) are New York, Arizona, New Mexico, Louisiana, California, Rhode Island, and Texas. The states with the least inequality (income ratios under 8) are North Dakota, Iowa, Indiana, and Utah.
The report notes that rising income inequality seems to have many causes, including a shift to higher-skill jobs, globalization, immigration, fewer factory jobs, and declining unionization. Like many economists, the authors worry about rising inequality--not only on moral grounds but also because it makes problems like poverty and crime more intractable, and undermines the political base of democratic capitalism.
If the economy slows or falls into recession, income disparities could well worsen again. With surplus revenues at hand, the authors think the states and federal government have a unique opportunity to craft tax changes, minimum-wage hikes, and other measures to keep that from happening.