Income Gap Grows in U.S.

Income Gap Grows in U.S. (Washington Times)

Incomes are growing smartly for the first time in years, spurring unexpectedly robust spending by consumers. The revival, however, is mainly among top earners who receive stocks, bonuses and other income in addition to wages.

The nearly 80 percent of Americans who rely mostly on hourly wages barely maintained their purchasing power, according to the Labor Department. Raises have been meager, averaging about 2.7 percent in the past year — a tad above the 2.5 percent inflation rate.

Incomes are up a more robust 7.5 percent when bonuses, stock compensation, commissions and other wage supplements are added, according to the Commerce Department.

Most of the boost, though, is felt by those at the top end of the income scale.

Federal Reserve Chairman Alan Greenspan expressed concern in testimony earlier this month about the disparity between wage-earners and high-income executives and professionals, which by some measures is the biggest in the United States since the Roaring ’20s

[…]

“I’m concerned about this. It’s a major issue in this country,” said Mr. Greenspan, who has announced he will retire in January.

“A free-market, democratic society is ill-served by an economy in which the rewards are distributed in a way” that leaves out the majority, he said. “Too many of our population … don’t feel the advantages and benefits coming from the system.”

Indeed. For anyone living near or below the median income of $28,654 the American Dream is increasingly out of reach.

FILED UNDER: Economics and Business
Leopold Stotch
About Leopold Stotch
“Dr. Leopold Stotch” was the pseudonym of political science professor then at a major research university inside the beltway. He has a PhD in International Relations. He contributed 165 pieces to OTB between November 2004 and February 2006.

Comments

  1. John Thacker says:

    Yawn. Wages not total compensation. Ignore.

    The “American Dream” is not increasingly out of reach as, once again, home ownership is at an all time high, the size of the median home keeps increase, car ownership is at an all time high, and of course ownership of TVs, washer/dryers, air conditioning, dishwashers and everything else is at an all time high. The average family in poverty has more appliances than the median family did in 1980.

  2. Charlie (Colorado) says:

    For anyone living near or below the median income of $28,654 the American Dream is increasingly out of reach.

    Uh, do you have any actual evidence for that? As John points out above, the lives of people at low incomes are markedly better in some notable ways then 25 years ago.

    More to the point, though, your statement presumes that people at or below $29K also won’t be above the median income in the future; in other words, every 16 year old selling hamburgers and every grad student on an assistantship is increasingly unlikely to ever do better.

    This assertion seems to me to … shall we say, require further support.

  3. John Thacker says:

    Reasons these sorts of inequality measures increase, which has only little to do with inequality:

    1. Education. College and post graduate education is much more common than it used to be. What happens when people get such education? They trade off several years of making moderately high income in exchange for making poverty-level wages for a few more years, but making higher wages once they get out. The result is to increase their own personal income inequality over their lifespan– their 20-something self is poorer by comparison to their 30 and 40-something self.
    However, not everyone is the same age. People are all in different stages of their own life. The massive increase in college and postgraduate education increases the income gap between rich and poor by making more poor 20-somethings even poorer but 30 and 40-somethings wealthier with their completed college education. Since these are the same people at different points in their life, we shouldn’t care.

    2) Marriage All the measures that show increasing inequality between rich and poor are household measures. The Census Bureau measures income per household, not per capita, when determining inequality. That means that when some couples divorce but others don’t, inequality decreases. Take two married households where each person makes $50,000. If one couple gets divorced, that creates two $50,000 households from one $100,000 household. The old situation had no inequality, the new one has much more inequality according to the Census Bureau. But not precisely in reality.Increasing divorce rates in a society where marriage is still the norm create a widening gap between richer (the married) and poorer (the single) even without changing per capita income of inequality at all. Certainly boosting marriage among the poor would help in many ways, but the household inequality statistics perhaps overestimate the true inquality involved.

    3. Women. Women and education and marriage. In the “old days,” middle and upper middle class women were less likely to
    work than poorer women; the higher the husband’s salary, the less likely the wife worked. This flattened inequality. The eighties and on have seen a great change in that. There are a lot more double income middle and upper middle class (and lower upper class) households now. (The massively upper end has seen less change, though.) Once you add in the tendency to marry people with similar incomes (I know a lot of two-doctor marriages, for example), it does affect household inequality. I certainly don’t want to turn back the clock or change things, but I do want to note the complicating factor.

    Regarding immigration which we discussed before. The Census Bureau estimates are about 1.2 million people immigrating to the US yearly. Immigrants are disproportionately (although not exclusively) of working age and poor. That’s a fairly significant proportion of the part of the population which is of working age. It’s enough to definitely affect the inequality statistics. I’ve seen plenty of reputable studies which do measure the immigrant effect. They find that if you remove new immigrants and look only at people who were already in the US (or were born here) inequality has not increased over any of these time periods. I favor letting people find a better life here, but they do skew the statistics.

    The wage statistics, as separate from the inequality statistics, are skewed because other forms of compensation, like leave and medical insurance, are seeing the growth. Total compensation for all jobs has been rising, but the cost of various benefits has been absorbing most of the increase.

  4. Mark says:

    Obviously what is needed is a tax increase. Why anyone needs more than, say, $5 million a year escapes me. What we can do is confiscate the earnings of over $5 million of anyone earning more than that much, and put it into a fund to redistribute that money to the less fortunate. That way, everyone will be well-off, regardless of the type of job and education they have! happy day!

    /end sarcasm

  5. Meezer says:

    Further, the first line, “spurring unexpectedly robust spending by consumers” doesn’t jive with the rest of the excerpt. People who were in the top compensation brackets were already buying darn near anything they wanted, why should their consumer spending “spur” because they have even more compensation?
    “robust spending” means a whole lotta people are doing better, and most of them were in a slot where more “stuff” is still attractive, i.e. middle class.

  6. Leopold Stotch says:

    Mostly good points; a few thoughts:

    Consider that much if not most consumer spending is done on credit, which is troublesome. (the average American has $8k in credit card debt alone)

    To suggest that these numbers should be ignored is silly. Even if non-wage compensation were rising for all equally, which it is not, you still have the people at the bottom experiencing stagnation or relative loss in purchasing power.

    These aren’t household numbers, but regardless the point is that the income gap is widening. There may be 1.2 million immigrants in these numbers, but they’re among 64 million taxpayers who earn less than $29k a year. Surely these aren’t all upwardly mobile grad students either.

    Obviously there is no simple answer, as Mark points out, but I have to say that I’m a bit surprised that there’s such aversion to recognizing that the income gap is worsening and that it is a problem.

  7. While I am not utterly dismissive of the income gap issue, I do wonder as to the blanket statement about the American Dream and meidan income. For one thing, it depends on where one lives. It also matters if there are more than one median-income earner in a family.

    Someone making 28k in rural Alabama may be able to afford a moderate home, while someone making 28k in NYC or the DC area is in bad shape.

  8. Herb says:

    Obviously Mr Thacker has never been at the mercy of an employer that will not offer a living wage to hes employees. And I doubt that Mr Thacker has ever had to do without items of food that his family was in need of or had to forgo a prescription drug that was needed, because he wasn’t making a living wage while his employer was making a fortune.

    I have seen in my 55 plus years of working, many different types of employers and I have been fortunate to work for several of the good ones. There are however many greedy employers that have no loyalty to his employees, but demands loyalty from his employees.

    I would like to see Mr Thacker hit the bricks and go out looking for an honest job in the same manner that most underpaid workers in America do.

    I suggest Mr Thacker that you go out where people who have to work for a living and judge for yourself how they “get along”

  9. I have to agree with Thacker. Over time, purchasing power has increased for everyone. Things that didn’t exist twenty years ago are widely available and this should continue. The median home size, etc. have increased for most people.

    I’m sympathetic to the idea of getting money to the poor, but the actual goods that the poor own today — compared to what they did twenty years ago — suggests they are far better off.

    Measuring real wages is a tricky business and doesn’t necessarily measure people’s actual well being or wealth.

  10. ICallMasICM says:

    ‘Obviously Mr Thacker has never been at the mercy of an employer that will not offer a living wage to hes employees. ‘

    We live in a market economy. If an employer doesn’t pay the market rate he has no employees. If sopmeone is offering higher for the same work then workers are free to leave.

  11. Again, look at income mobility, not just snapshots of current disparity.

    The plain fact is, people at the lower end of the pay scale can and do work their way up. It’s true that some don’t, but almost everyone can work their way up. And most do.

    Same link as my last comment:
    http://www.vinod.com/blog/News/KlingontheRichPoorGap.html

    The US birth rate is below the population replacement rate. Yet our population still grows. So a lot of the low-paying jobs are filled with immigrants, teens, retirees, and people who simply don’t want the stress of a higher paying job. I know a personal shopper at Nordstroms who probably makes very little money, yet she and her husband own a lakefront house with a 33′ powerboat. But her income stats lump her in with the people you think need more protecting.

    You can improve your earning power. A GED or high school diploma is not going to get you anywhere career-wise. But almost anyone can train to be a personal trainer, masseuse, bookkeeper, etc. and make a decent living after a little training. Anyone can open a little business, whether its driving a cab, running a hot dog stand, or installing software upgrades for local companies.

    We choose to blog. We probably spend more than we make from this hobby. It’s not helping our careers. If we devoted 1/2 as much time to career development, job training, education, etc… We’d both be much further along in our own careers.

    Moreover, the “gap” is a non-issue. The real issue is the purchasing power of the lower tiers in society. Their purchasing power is being largely eroded by taxes, regulations, litigation, and market inefficiencies brought on my excess government intrusion.

    I can back that up, but that would be a whole column, not a comment.

    Bottom line, really, is that you are drawing the wrong conclusion from looking at one statistic in isolation. Look at the bigger picture, broader trends, root causes, solutions…

    The poorest americans now have access to cheap phones, computers, clothes (Wal-Mart), food… Indeed, the poorest Americans are better off than the AVERAGE Americans back in 1970:

    http://techcentralstation.com/071504B.html

    It’s not all gloom and doom, not matter how much you want it to be.