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EMPLOYMENT LAW — 2/10/06

U.S. income inequality grew over the past two decades

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 low- and 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.

States can help to offset trend

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," noted Elizabeth McNichol, Senior Fellow, Center on Budget and Policy Priorities and co-author of the report. 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.

Source: Economic Policy Institute

For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.

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