Harmful Income Gap Increases

Income Inequality Impacts Health, Education, Crime

Across the country, wages for lower and middle income Americans are not keeping pace with the highest incomes, leading to an economic inequality that is challenging the country’s quality of life. According to the report, “Pulling Apart: A State-by-State Analysis of Income Trends,” released recently by the Center on Budget and Policy Priorities and the Economic Policy Institute, the economic growth that has taken place over the past two decades has disproportionately benefited the wealthiest fifth of the population. The report analyzes the trend for each state, and calls on state governments to institute policies that will mitigate the gap and improve the access to necessities for those in the lower income groups.

As the report notes, this growth in inequality can have seriously negative consequences for the country as a whole. As the authors state,

…there is evidence that income inequality causes direct harm to the poor. For example, a considerable body of research links income inequality to poor health outcomes. Further, a number of papers at a recent conference on income inequality…found a link between higher levels of inequality and poor schools, substandard housing, and higher levels of crime victimization.

Methodology

The study measures family income during the early 1980s, the early 1990s, and the early 2000s by averaging incomes over three years during each period. The income figures include wages and salaries, income earned from interest accrual, and cash income, including government benefits, all of which are drawn from the Bureau of the Census’s March Current Population Survey. The figures also account for federal taxes, in-kind government benefits such as food stamps and housing vouchers, and capital gains income. Every dollar figure referred to is in 2002 dollars.

This methodology underreports income inequalities for two reasons. The first is that during the starting point for the study, the early 1980s, a dip in income was occurring as a result of a recession, making it a particularly bad time for low-income families. Therefore, much of the subsequent growth in average income for that group was simply restoring the average to pre-1980 levels. The second is that the figures do not reflect growth in the top one percent of the income scale, where other studies have found that especially rapid income growth has occurred.

The Growing Gap

The results of this study are widely troubling, as in virtually every indicator the income gap between low- and high-income, and middle- and high-income, groups increased or stayed the same. As the report details, during the twenty-year period covered, the average income for the poorest one-fifth of families grew by $2,660 after being adjusted for inflation. During the same period, the average income of families in the wealthiest one-fifth of families grew by $2,148 inflation-adjusted dollars each year. In the early 2000s, the average high-income family had an income seven times greater than the average low-income family.

As Paul Krugman has reported in the New York Times, much of this growth takes place within the top one percent of high-income families. The report shows that the top five percent of high-income families earn, on average, a striking 12 times the average income of a family in the bottom fifth of the income scale. And as Krugman reported, studies have shown that individuals at the 90th percentile have seen their income grow 34 percent between 1972 and 2001, while those at the 99th percentile, or the top one percent, saw income growth of 87 percent. Those in the top 0.1 percent saw income growth of 181 percent, and those in the top 0.01 percent saw average incomes grow an incredible 497 percent. While not reflected in the report, these numbers further illustrate the dramatic growing separation between high- and low-income Americans.

By breaking down the data for each state, the authors determined that income growth in the top-fifth of the income scale outpaced growth in the bottom fifth of the income scale in 38 of the 50 states. In 11 states, low-income and high-income families increased their average incomes at approximately the same rate, while in only one state, Alaska, did the average income of the low-income bracket increase at a faster rate than that of the high-income bracket. Furthermore, the ratio of high-income to low-income average incomes grew in 39 states. The gap grew even between the top fifth and the middle fifth on the income scale; in 39 states the income of the top fifth grew faster than the income of the middle fifth, on average twice as fast. The growth rate was about the same in the 11 other states.

The Gap’s Causes

The report’s authors attribute these changes to a number of factors. The growing income gap is largely a result of a growing wage gap, which itself is caused by economic trends such as job outsourcing, global competition, growth within the service sector, and weaker unions. As middle-wage jobs are sent overseas, they are replaced largely by low-wage jobs. Corporations continue to profit off of these trends, and so increasing income from investments has also served to increase income disparities.

Government policies have also contributed to the growing gap. The report states,

…deregulation and trade liberalization, the weakening of certain aspects of the social safety net, the lack of effective labor laws regulating the right to collective bargaining, and the declining real value of the minimum wage have all contributed to growing inequality. 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.

While overall federal tax policies are actually progressive, placing a greater tax burden on those who can better afford it, changes in federal tax policies over the past two decades have served to make it more regressive. Furthermore, state tax policies are largely regressive, placing a greater burden on low-income families than on higher-income families. States receive most of their tax revenue from sales and excise taxes, which constitute a disproportionate percentage of the resources of a low-income family. The result is that poor families are struggling to get by while wealthier families accrue wealth at ever-increasing rates.

The Gap’s Impact

The growing gap between Americans who earn the most and those who earn the least has serious ramifications for the everyday life of these families, especially those in the lowest income bracket. As stated earlier, research has shown “a link between higher levels of inequality and poor schools, substandard housing, and higher levels of crime victimization.”

This impact hits children of low-income families especially hard. The report notes that, “[c]hildren who grow up in families with incomes below the poverty line have poorer health, higher rates of learning disabilities and developmental delays, and poorer school achievement than non-poor children. They also are far more likely to be unemployed as adults.” The direct impact of family income level on student achievement has been repeatedly proven. In an era when “No Child Left Behind” is one of the most repeated phrases in education, low-income students are consistently being left behind. In fact, “increased income disparities have led to increased disparities in the quality of schools, as wealthier families have moved to the suburbs. That makes it harder for poor children to acquire the skills they need to succeed.”

As the research has shown, high inequality in wages has enormous detrimental impact on low-income families, as well as on society as a whole. The government remains capable of counteracting some of the harsh economic pressures that have caused this rise in inequality, and the report closes by recommending some concrete measures that might mitigate the harmful effects of the income gap. Raising the minimum wage, improving the progressivity of state taxes, increasing the power of unions, and widening access to social services are just some of the relatively simple methods by which the government can control increasing disparities. For, as the report notes, as more wealth is concentrated in the hands of a relatively small group of people,

…support for the taxes necessary to finance government programs declines, even as the nation’s overall ability to pay taxes rises. The failure to invest adequately in programs that educate children, meet the health and housing needs of families at all income levels, and support low-wage workers can dampen the nation’s future economic growth.

Prepared by Nelly Ward, March 13, 2006