Pulling Apart: A State-by-State Analysis of Income Trends

PDF of this report (66pp.)

By Jared Bernstein, Elizabeth McNichol and Karen Lyons

January 26, 2006

View the most recent version of this report:
Pulling Apart: A State-by-State Analysis of Income Trends
April 9, 2008

Executive Summary

The worst effects of the 2001 recession have largely been left behind. The return of economic growth is good news, but this good news is tempered by the fact that the troubling trends in income distribution during the last decades of the 20th century persist in the current century.

Between the early 1980s and the early 2000s, the incomes of the country’s highest-income families climbed substantially, while middle- and lower-income families saw only modest increases in income. During the late 1990s exceptionally low unemployment rates did yield significant gains for low-wage workers and relatively broad-based wage growth. But even the positive trends of the late 1990s were not enough to reverse the tide of growing inequality.

Moreover, the broad-based wage growth of the late 1990s ended in the wake of the 2001 downturn. Real wages for low- and moderate-income families grew more slowly in 2002 and the first part of 2003 than in previous years and then began to decline. The highest-income families also saw declines in real income as a result of the large drop in the stock market, but this decline was short-lived; the incomes of the richest families appear to have rebounded strongly since 2002.

The recession’s impact on poor and middle-income families has lingered for longer than is usual. Unemployment has not fallen far enough to generate the income gains among low- and middle-income families that were seen in the late 1990s. In addition, federal tax cuts targeted primarily to high earners served to widen the gap between the incomes of the wealthiest families and those with low and moderate incomes. As result, income inequality has begun to increase again.

The trend of growing inequality has occurred in most parts of the country. Income disparities between the top fifth and bottom fifths of families in the income distribution grew in 39 states over the past two decades; in the remaining states, income inequality remained about the same. Income disparities did not decline significantly in any state during this period. Even during the 1990s, the gap between high-income and low-income families grew in almost half of the states.

The income gap between high-income and middle-income families also grew over the last ten and 20 years. Between the early 1980s and the early 2000s, the gap between high- and middle-income families grew in three-fourths of the states; it did not decline in any state. Between the early 1990s and the early 2000s, this gap increased in 21 states.

Here and elsewhere in the paper, changes in income inequality are determined by calculating the income gap — the ratio between the average family income in the top fifth and the average family income in the bottom fifth (or the middle fifth) — and examining changes in this ratio over time. These changes are then tested to see if they are statistically significant. States fall into one of three categories: (1) states where inequality increased – that is, the ratio increased by a statistically significant amount, (2) states where there was no change in inequality – the change in the ratio was not statistically significant and (3) states where inequality decreased by a statistically significant amount.

While the national trend toward increasing inequality has received widespread coverage, less attention has been focused on how this trend has varied by state. This analysis examines trends in income inequality in each of the 50 states over the past two business cycles.

Income Inequality Increased in Most States Over the Last Two Decades

Across the nation, the income gap between the richest and poorest fifths of families is significantly wider than it was two decades ago:

  • In 38 states, the incomes of high-income families grew faster than the incomes of low-income families between the early 1980s and the early 2000s. Of the remaining states the incomes of the bottom fifth and the top fifth of families increased about the same amount in 11 states. In one state — Alaska — the income of low-income families grew at a faster rate then the income of high-income families.
  • On average, nationally, the incomes of the poorest fifth of families grew by $2,660 over the two-decade period, after adjusting for inflation. By contrast, the incomes of the richest fifth of families grew by almost that much ($2,148) each year over the course of the two decades, for a total increase of $45,100.

The widening income gap is even more pronounced when one compares families in the top five percent of the income distribution (rather than the top fifth) to the bottom 20 percent.

  • In the 11 large states for which this comparison is possible, the incomes of the top five percent of families increased by 73 percent to 132 percent between the early 1980s and the early 2000s. By contrast, the incomes of the bottom fifth of families in these states increased by 11 percent to 24 percent over the same period.[1]
  • In the 11 large states analyzed, the increases in the average incomes of the top five percent of families ranged from $80,400 to more than $153,000. In five states — Massachusetts, Michigan, New Jersey, New York, and Pennsylvania — the increase exceeded $100,000. By contrast, the largest increase in average income for the bottom fifth of families in these states was only $4,000. In New York, for example, the average income of the top five percent of families grew by $105,000, while the average income of the bottom 20 percent increased by only $1,900.

Middle-income families also lost ground compared to those at the top. In 39 states, the gap between the average income of middle-income families and the average income of the richest fifth of families widened significantly.

Wide Gap Separates High-Income Families from Poor and Middle Class

The resulting disparities between the incomes of high- and low-income families are substantial.

  • In the United States as a whole, the poorest fifth of families had an average income of $16,780 in the early 2000s, while the top fifth of families had an average income of $122,150, or more than seven times as much.
  • In the early 1980s, there was no state in which the average income of high-income families was as much as 6.4 times larger than the average income of low income families. By the early 2000s, 32 states had “top to bottom” ratios of 6.4 or greater. The increase in income disparities was greatest in Arizona (with the largest disparity), New York, Massachusetts, Tennessee, New Jersey, West Virginia, Connecticut, Hawaii, Kentucky, and South Carolina.
  • By the early 2000s, the average incomes of the top five percent of families were 12 times the average incomes of the bottom 20 percent. The states with the largest such gap were Arizona, Texas, New York, New Jersey, Kentucky, Tennessee, Florida, California, North Carolina, and Pennsylvania.

Similarly, the income gaps between high-income and middle-income families have grown:

  • In the early 1980s, there was only one state — Alaska — in which the average income of the top fifth of families was more than 2.3 times larger than the average income of the middle fifth of families. By the early 2000s, the “top-to-middle” ratio was greater than 2.3 in 36 states.
  • The states with the largest gaps between high-income and middle-income families were Texas, Kentucky, Florida, Arizona, Tennessee, New York, Pennsylvania, North Carolina, New Mexico, and California.

Prosperity of 1990s Was Not Shared Equally

Inequality did not grow as quickly during the 1990s as during the prior decade (or as quickly as it appears to be growing in the 2000s), but income gaps continued to grow in many states.

  • In close to half of all states, the income gap between the top and bottom of the income distribution grew between the early 1990s and the early 2000s. In 21 states, average incomes grew more quickly among the top fifth of families than among the bottom fifth.
  • By contrast, the average incomes of the bottom fifth of families grew significantly faster than the incomes of the top fifth in only one state - Georgia.

The incomes of very high-income families — the richest five percent — grew dramatically between the early 1990s and the early 2000s. In eight of the 11 large states analyzed, the incomes of the top five percent grew substantially faster than the incomes of the poorest 20 percent.

Families in the middle of the income distribution have fallen farther behind upper-income families in many states over the past decade:

  • In some 21 states, the ratio of the incomes of the top fifth of families to the middle fifth of families increased between the early 1990s and the early 2000s. Income disparities between the top and middle fifths of families increased most in Kentucky, Pennsylvania, North Carolina, Indiana, Tennessee, Texas, West Virginia, Vermont, New Jersey, and Connecticut. The top-to-middle ratio did not decline significantly in any state.

Causes of Rising Inequality

Researchers have identified several factors that have contributed to the large and growing income gaps in most states. The growth of income inequality is primarily due to the growth in wage inequality. Wages at the bottom and middle of the wage scale have been stagnant or have grown only modestly for much of the last two decades. The wages of the very highest-paid employees, however, have grown significantly.

Several factors have contributed to increasing wage inequality, including long periods of high unemployment, globalization, the shrinkage of manufacturing jobs and the expansion of low-wage service jobs and immigration, as well as the lower real value of the minimum wage and fewer and weaker unions. These factors have led to an erosion of wages for workers with less than a college education, who make up approximately the lowest-earning 70 percent of the workforce. More recently, even those with a college education have experienced real wage declines, in part due to the bursting of the tech bubble in high-wage industries, but also due to the downward pressure on wage growth from offshore competition.

Only in the later part of the 1990s was there a modest improvement in this picture. Persistent low unemployment, an increase in the minimum wage, and rapid productivity growth fueled real wage gains at the bottom and middle of the income scale. Yet those few years of more broadly shared growth were not sufficient to counteract the two-decade-long pattern of growing inequality. Today, inequality between low- and high-income families and between middle- and high-income families is greater than it was either 20 years ago or ten years ago.

The expansion of investment income (such as dividends, rent, interest, and capital gains) during the 1990s also contributed to increased income inequality, since investment income primarily accrues to those at the top of the income structure. The large increase in corporate profits during the recent economic recovery has also contributed to growing inequality by boosting the incomes of investors.

Government policies — both what governments have done and what they have not done — have contributed to the increase in wage and income inequality over the past two decades in most states. For instance, 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.

States Can Choose a Different Course

A significant amount of increasing income inequality results from economic forces that are largely outside the control of state policymakers. State policies, however, can mitigate the effects of these outside forces. States play a major role in setting labor-market policies that affect income inequality, such as rules governing the formation of unions, the design of the unemployment insurance systems, and the establishment of state minimum wages.

The minimum wage, for example, has a direct bearing on individual earnings. The federal minimum wage has not been adjusted for more than eight years, and its real value has fallen considerably since the late 1970s. States can help reverse or moderate the decline in wages for workers at the bottom of the pay scale — and compensate for the decline in the value of the federal minimum wage — by enacting a higher state minimum wage, as 18 states and the District of Columbia have done.

Improvements are also warranted in the unemployment insurance system. During the 1980s, unemployment insurance protection for both middle- and low-income families eroded as a result of federal and state cutbacks. The share of jobless workers receiving these benefits is now lower than at the end of the 1970s. Efforts are needed at the national and state levels to make more unemployed workers eligible for unemployment assistance.

In addition, there are a host of options that state policymakers can consider to strengthen their social safety nets. Previous federal and state changes to programs that assist low-income families have contributed to the increase in income inequality in recent years. The number of families receiving cash assistance has fallen significantly, for example, as states have placed increasing emphasis on reducing their cash assistance caseloads. The number families receiving cash assistance, which peaked at 5 million in the early 1980s, dropped by more than 57 percent by 2000. While studies indicate that one-half to three-quarters of former welfare recipients are employed shortly after they leave the rolls, many families continue to face significant barriers to obtaining and keeping steady, well-paid work. These barriers are likely to retard income gains for the lowest-income fifth of families.

In addition, for those families who continue to receive cash assistance, the value of these benefits has fallen in a number of states. In the typical state, cash assistance benefits for a family of three with no other income fell by more than 18 percent between 1994 and 2003, after adjusting for inflation.

States can strengthen their social safety nets by providing low-wage workers with supportive services such as transportation, child care, and health coverage. They can also provide intensive case management and other services to help current and former welfare recipients maintain their present employment, move into better jobs, or obtain the education and training needed for career advancement.

In addition, states can improve coordination among the low-income programs they administer. By adopting simpler, more streamlined rules and procedures regarding applications, eligibility determination, and other matters, states can make these programs easier for eligible families to participate in and easier for states to administer.

States also can modify tax policies that influence the distribution of post-tax income. (The income inequality data in this report reflect the effects of federal taxes but not state taxes.) The overall effect of the federal income tax system is to narrow income inequalities (that is, the federal tax system is progressive), though the system has become less so over the past two decades as a result of changes such as those enacted in 2001. Nearly all state tax systems, in contrast, are regressive. Because states rely more on regressive sales taxes and user fees than on progressive income taxes, they take a larger percentage of income from low- and middle-income families than from the wealthy.

When many states cut taxes during the strong economy of the 1990s, nearly all chose to make the majority of the cuts in their income taxes. Yet states that raised taxes to address budget problems resulting from the recession of the early 1990s were more likely to raise sales and excises taxes than income taxes. Both of these actions rendered state tax systems even more regressive.

Now that economic growth has returned, state finances are improving. Despite the fact that most states have a long way to go before revenues and services are restored to pre-recession levels, some states are again beginning to consider tax reductions. There are many ways that states can improve the progressivity of their tax systems in a time when they may be considering tax reductions. For example, states can increase their reliance on income taxes rather than sales taxes (which place a disproportionate burden on low-income families) by cutting sales tax rates rather than income tax rates. Another way to lessen the negative impact of state tax systems on the poor is to broaden the sales tax base to include more services consumed by high-income families.

States also can enact tax credits targeted to low income taxpayers. For example, more states could follow the lead of the 17 states that have adopted state earned income tax credits. And states can improve the progressivity of their tax systems by restoring state estate taxes that were eliminated as a result of the phaseout of the federal estate tax.

State policies constitute only one of a range of factors that have contributed to the increasing disparities in incomes over the past decade. If low- and middle-income families are to stop receiving steadily smaller shares of the income pie, federal as well as state policies will have to play an important role.

TABLE A:
TOP TEN STATES FOR SELECTED INCOME INEQUALITY MEASURES

Greatest Income
Inequality Between
the Top and the Bottom,
Early 2000s

Greatest Incom
 Inequality Between
the Top and the Middle,
Early 2000s

1. New York

1. Texas
2. Texas 2. Kentucky
3. Tennessee 3. Florida
4. Arizona 4. Arizona
5. Florida 5. Tennessee
6. California 6. New York
7. Louisiana 7. Pennsylvania
8. Kentucky 8. North Carolina
9. New Jersey 9. New Mexico
10. North Carolina 10. California

Greatest Increase
 in Income Inequality Between
the Top and the Bottom,
Early 1980s to Early 2000s

Greatest Increases
in Income Inequality
Between the Top and the Middle,
Early 1980s to Early 2000s

1. Arizona 1. Kentucky
2. New York 2. Pennsylvania
3. Massachusetts 3. West Virginia
4. Tennessee 4. Indiana
5. New Jersey 5. Hawaii
6. West Virginia 6. Texas
7. Connecticut 7. Tennessee
8. Hawaii 8. North Carolina
9. Kentucky 9. Arizona
10. South Carolina 10. New York

Greatest Increases
in Income Inequality
Between the Top and the Bottom,
Early 1990s to Early 2000s

Greatest Increases
in Income Inequality
Between the Top and the Middle,
Early 1990s to Early 2000s

1. Tennessee 1. Kentucky
2. Connecticut 2. Pennsylvania
3. Washington 3. North Carolina
4. North Carolina 4. Indiana
5. Utah 5. Tennessee
6. Texas 6. Texas
7. West Virginia 7. West Virginia
8. Pennsylvania 8. Vermont
9. Florida 9. New Jersey
10. Maine 10. Connecticut

End Notes:

[1] An analysis of the average income of the top five percent of families was conducted for eleven large states that have sufficient observations in the Current Population Survey to allow the calculation of reliable estimates of the average income of the top five percent of families. These states are California, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, and Texas.

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