Pulling Apart:
A State-by-State Analysis of Income Trends - Chapter Two
by Kathryn Larin and Elizabeth McNichol

II. The Long-Term Trend: The Late 1970s to the Mid-1990s

Nationwide, income inequality increased significantly during the 1970s and 1980s, a stark reversal of the trend towards lessening inequality that prevailed between World War II and the 1970s. Gaps in income between high-income families and poor families — and between high-income families and middle-income families — have widened across the United States, in every region and in virtually every state. As a group, low-and middle-income families have seen their incomes either stagnate or decline, while the incomes of the wealthiest families have continued to rise.

To assess how families with children at different income levels have fared over the past two decades, this report measures income inequality at three points in time: the late 1970s, the mid-1980s, and the mid-1990s. These periods reflect comparable points in the economic cycle. For each time period, all families with children are ranked by income and divided into five groups (or "quintiles"), each comprising of the same number of families. The average income of families in each quintile is then calculated for each of the three time periods. The change in the income held by each quintile is one way in which researchers commonly measure changes in the distribution of income over time.

Looking at the period from the late 1970s to the mid-1990s, the differences between the income trends of families at the bottom of the income distribution and the income trends of families at the top of the distribution are striking. Figure 1 below shows the number of states in which the average incomes of each fifth of the distribution rose or fell between the 1970s and the 1990s. As shown, in most states, lower- and moderate- income families experienced a decline in income, while in most states high-income families saw their incomes increase. For example, the poorest fifth of families experienced a decline in income in 44 states. The incomes of the poorest fifth rose in only 6 states. In contrast, in every state, the average incomes of the richest fifth of families increased.

Income Trends: Differences Between High- and Low-Income Families

In comparing the varying income trends of families with children at different points in the income distribution, perhaps the starkest contrast is between the richest fifth of families and the poorest fifth of families. Table 1 shows how families with children in the top and bottom fifths of the distribution have fared since the 1970s in each of the 50 states. The table presents both the percentage change in average incomes and the dollar change in average incomes. (The direction of most of the changes in average incomes are statistically significant at the 95 percent level of confidence. See the footnote to Table 1 for details.)

In 44 states, the poorest fifth of families with children grew poorer between the late 1970s and the mid-1990s. In 16 of those states, the income of families with children in the bottom quintile of the income distribution dropped by more than 20 percent. In 10 states — Arizona, Connecticut, Kentucky, Louisiana, Michigan, New York, Ohio, Oklahoma, West Virginia, and Wyoming — the poorest fifth of families experienced a decline in income of more than 30 percent.

In every state in the nation, by contrast, families with children in the top 20 percent of the income distribution saw their incomes swell between the late 1970s and the mid-1990s. In 31 states, the incomes of the upper fifth of families jumped by over 20 percent.

In each of the 44 states in which the incomes of the bottom fifth of families fell — the states in which the poor grew poorer — high-income families were growing richer. In Michigan, for example, the average income of the bottom fifth of families with children fell by $4,200 from the late 1970s to the mid-1990s, a drop of over 30 percent. Over the same period, Michigan's richest 20 percent of families with children saw their incomes rise by nearly $21,000, or over 21 percent. (All figures are presented in 1997 inflation-adjusted dollars.)

Average incomes of poor families did not fall in every state between the late 1970s and the mid-1990s; there are six states where the incomes of the bottom fifth of families rose over the period.

Nevertheless, income inequality increased in four of the six states in which incomes of the families in the lowest quintile rose. In three of these four states — New Jersey, Utah, and Vermont — the modest increases in the incomes of the poorest fifth of families were far smaller, as a percentage of income, than the gains made by the top fifth of families.

In Utah, for example, the average income of families in the bottom fifth of the distribution increased a modest 4 percent, or $660 between the late 1970s and the mid-1990s. Families in the top fifth of the distribution, on the other hand, saw their incomes rise by over 28 percent, or by more than $24,000.

In the remaining two states — Alaska and North Dakota — the incomes of both the poorest families and the richest families increased, but the percentage increase in the incomes of the bottom fifth of families exceeded the percentage increase for the top fifth of families, thereby reducing income inequality in those three states.

For example, in Alaska, the average income of the poorest 20 percent of families with children increased from $13,165 to $14,868 between the late 1970s and the mid-1990s, an increase of nearly 13 percent. The average income of the richest 20 percent of families with children rose from $123,938 to $129,025 over the same period, an increase of four percent. (Note that the dollar increase in income was much larger for upper-income families than for lower-income families.)

Changes in Income Gaps

One commonly used measure of income inequality is the gap between the average income of the poorest fifth of families and the average income of the richest fifth of families. The gap in income between high- and low-income families at any point in time may be measured by dividing the average income of the top quintile by the average income of the bottom quintile. This calculation provides a "top-to-bottom" income ratio. Table 2 shows the top-to-bottom ratios in all fifty states in the 1990s, and the ranking of each state. New York, ranked first, has a larger income gap between the top fifth of families with children and the bottom fifth than any other state.

There were seven states — Arizona, California, Connecticut, Florida, Louisiana, New Mexico, and New York — where the average income of the richest fifth of families was more than fourteen times as great as the average income of the bottom fifth of families. In most of these states, the average income of the bottom fifth of families with children was well below the national average.

At the other end of the spectrum, there were only five states — Iowa, North Dakota, Utah, Wisconsin, and Vermont — where the richest fifth of families had less than eight times the average income of the bottom fifth. These are the states where income was distributed least unevenly, although the gap between high-income and poor families was still quite large. In these five states, the average income of the bottom fifth of families with children was well above the national average.

Map 1

Map 1 shows the most and least unequal states as measured by the top-to-bottom ratio in the mid-1990s. Inequality is greatest in the southeastern and the southwestern states. The Midwest Plains region and northern New England are the least unequal.

Changes in inequality over time can be assessed by comparing the top-to-bottom ratios of states in the 1990s to their values in the 1970s. Table 3 compares the top-to- bottom ratios for each of the 50 states in the late-1970s to the same ratios in the mid-1990s. Inequality has grown substantially over the period. In the late 1970s, there was no state where high income families had average incomes ten or more times larger than the average incomes of low-income families. By the mid-1990s, 30 states had "top-to-bottom" ratios of 10 or greater. The last column of Table 3 shows the extent to which the top-to-bottom ratios grew over the two-decade period. The rank of each state shows how the growth in inequality in that state compared to the growth in inequality in other states.

The greatest increase in income inequality occurred in Connecticut. In the late 1970s, the richest fifth of families with children had about 6 times the income of the poorest fifth of families on average. By the mid-1990s, the richest fifth of families had over 14 times the income of families in the bottom fifth of the distribution. The increased inequality resulted in part from a drop in the income of families in the bottom quintile of the distribution from $16,554 to $10,415 on average — a decline of more than $6,100 — between the late 1970s and the mid-1990s. Meanwhile, the average income of families at the top of the distribution in Connecticut increased from $96,782 to $147,594, an increase of more than $50,000.

Changes in Income Shares

Another way to measure changes in income inequality over time is to look at changes in the share of total family income held by each fifth of families in the income distribution.

Figure 2 above shows the number of states where the share of income held by each quintile rose or fell between the late 1970s and the mid-1990s. As shown, in virtually all states, the share of income held by the bottom 80 percent of families fell over the period. By contrast, in all but one state, the percentage of the states' total family income held by the richest families increased since the 1970s.

Table 4 below shows the share of income held by the top and bottom fifths of families with children in each of the states in the late 1970s and in the mid-1990s. Alaska, Arkansas, and North Dakota were the only states in which the share of income held by the bottom fifth of families increased between the 1970s and the 1990s. In each of the remaining 47 states, the share of income held by the poorest fifth of families decreased. The share held by the top fifth of families increased in every state except North Dakota.

Income Trends: Differences between High- and Middle-Income Families

It was not only the poor as a group that failed to share in the income growth that has occurred since the late 1970s. In most states, families in the middle of the distribution were also left behind compared to families at the top of the income distribution.

Table 5 shows the dollar and percentage change in the average incomes of families with children in the middle and top fifths of the income distribution between the late 1970s and the mid-1990s.

• In 25 states, the average incomes of families in the middle fifth fell while the average incomes of those in the top fifth rose. In Texas, for example, families with children in the middle fifth of the income distribution saw their incomes fall by $4,650 from the late 1970s to the mid-1990s, a drop of 11 percent. Incomes of the richest 20 percent of families with children in Texas increased by $19,100 over the same period, or by 20 percent.

• In 24 states, the average incomes of families in the middle of the distribution rose modestly, but did not keep pace with the increases in average incomes of families with children in the top 20 percent of the distribution. In North Carolina, for example, the average incomes of the middle fifth of families with children increased 8 percent, or by $2,850. The richest 20 percent of families in North Carolina, however, saw their incomes increase by $29,000 on average, an increase of 37 percent.

• In only one state, North Dakota, the average income of families in the middle fifth of the income distribution grew at a slightly faster pace than the average income of families in the top fifth of the income distribution.