A State-by-State Analysis of Income Trends
by Kathryn Larin and Elizabeth McNichol
Since the late 1970s, the changes in incomes experienced by different groups of families has varied significantly and substantially. From the late 1970s to the mid-1990s, the average incomes of the lowest-income families with children fell more than 20 percent nationwide, after adjustment for inflation. Over the same time period, the average real incomes of the middle fifth of families fell by over $700, a decline of about two percent. By contrast, the average incomes of high-income families increased by nearly 30 percent. As a result, income disparities between the top fifth of families and families at the bottom and the middle of the income distribution have grown substantially in almost every state over the past two decades.
Even the prolonged economic growth of the past several years has failed to reverse the long run trend toward increasing income inequality. Despite the extended period of generally positive economic developments, many middle- and lower-income families have faced stagnant or declining income levels. The most recent Census data reveal that the average incomes of families in the bottom three-fifths of the U.S. population are lower now than a decade ago. Only the top two-fifths of families have average incomes above the levels of the mid-1980s.
While the national trend toward increasing income inequality is clear, few analyses have focused on how this trend has varied by state and by region. This analysis examines trends in income inequality in each of the 50 states over the past two business cycles. The results are striking. In 48 states, the gap between the incomes of the richest 20 percent of families with children and the incomes of the poorest 20 percent of families with children is significantly wider than it was two decades ago.
Incomes of the poorest fifth of families with children, however, declined in 44 states between the 1970s and the 1990s. In some states, the decline was exceptionally steep. For example, the incomes of the poorest fifth of families with children fell more than 30 percent over this period in Arizona, Connecticut, Kentucky, Louisiana, Michigan, New York, Ohio, Oklahoma, West Virginia, and Wyoming.
Thus, in 44 states upper-income families have gotten richer and the poor have become poorer since the late 1970s.(1)
Income disparities between high- and low-income families also widened in four other states. In these states the real incomes of the lowest-income 20 percent of families grew over the two decades, but at a lower rate than the incomes of the richest 20 percent increased.
About the Data
This report is based on before-tax income data for families with at least one child under the age of 18, from the Census Bureau's March Current Population Survey public use files. The report compares "pooled" data from the three most recent years for which data were available 1994, 1995, and 1996 to pooled data from the late 1970s and the mid-1980s. The purpose of pooling these data was to increase the sample size of the data and hence their precision. Comparisons between the three time periods chosen for the report are appropriate because the three periods all reflect similar stages in the economic cycle three to five years after a recession.
Only in Alaska and North Dakota has the gap between the incomes of the richest and the poorest residents narrowed over the past 20 years.
The resulting disparities between the incomes of high- and low-income families are vast.
In the late 1970s, there wasn't a single state in which the highest-income 20 percent of families had incomes that on average were 10 or more times the average incomes of the lowest-income families. By the mid 1990s, 30 states had "top-to-bottom ratios" of 10 or greater. The increase in income disparities between the top and bottom fifths of families was greatest in Connecticut, New York, West Virginia, Arizona, Kentucky, Pennsylvania, Oklahoma, Ohio, California and Kansas (listed by the degree of the increase; see Table A).
In the United States as a whole, the poorest 20 percent of families with children had an average income of $9,250 in the mid-1990s, while the average income of families with children in the top 20 percent of the income distribution was $117,500, or 13 times as large. In seven states Arizona, California, Connecticut, Florida, Louisiana, New Mexico, and New York the incomes of the top 20 percent of families with children were more than 14 times as large as the incomes of the bottom 20 percent of families in the mid-1990s.
In virtually all states, the gap between the average incomes of middle-income families with children and the average incomes of the richest 20 percent of families with children also widened.
The average incomes of families in the middle fifth of the income distribution fell in 25 states between the late 1970s and the mid-1990s. In eight of the 25 states, the incomes of middle-income families with children declined by 10 percent or more. In all of these states, the average incomes of the top fifth of families increased. In another 24 states, income disparities between middle- and high-income families widened because the average income of the middle fifth of families increased modestly, but did not keep pace with the income growth of the top fifth of families.
By the mid-1990s, there were 40 states where the gap between the highest-income 20 percent of families and the middle 20 percent of families with children was larger than it had been for any state during the late 1970s.
The long-term trend toward increasing inequality has continued over the past decade despite the economic growth of recent years. In most states, no progress was made toward reducing income inequality between the mid-1980s and the mid-1990s. To the contrary:
Whereas in some states the poorest 20 percent of families made modest gains relative to high-income families over the past decade, families in the middle of the income distribution have continued to fall farther behind upper-income families in nearly all states. The gap between middle class and high-income families with children has increased in all but three states over the past decade.
On average in the United States, the share of income held by the middle fifth of families fell from 17.4 percent to 16.1 percent of total income, while the share held by the richest fifth of families increased from 42.9 percent to 46.6 percent of total income.
Researchers have identified several factors that have contributed to the large and growing income gaps in most states. These factors can be broadly categorized into two broad forces: developments in the private economy and changes in government policy. While economic trends are the major force driving the growth in income disparities in most states, government policies at both the federal and the states levels have contributed to this increasing inequality.
Several fundamental changes in the United States economy have led to increasing disparities in the wages paid to low- and middle-income workers relative to highly-skilled, highly-paid workers. Economic growth has slowed relative to the high growth rates of the 1950s and 1960s, contributing to stagnating wages among lower- and middle-income families. The decline of many domestic manufacturing industries, exacerbated by increasing international competition, has led to a decline in the number of well-paid manufacturing jobs for low-skilled workers. Low-paying service sector jobs have been replacing higher-paying manufacturing jobs. Meanwhile, technological innovations such as the increasing use of computers have increased the demand for skilled workers, and diminished the demand for lower-skilled workers. As a result, the difference between the average wages of high school graduates and the average wages of college graduates increased markedly between the mid-1980s and the mid-1990s. The decline in unionization also has contributed to the increase in income inequality.
Wages represent only one part of a family's total income. Investment income including capital gains has increased substantially over the past two decades, particularly among the top 20 percent of families. Average investment income received by the richest of these families the top five percent of the income distribution climbed 56 percent after adjustment for inflation between 1979 and 1994, reaching more than $51,000 per household in 1996. (The Census data used in this report exclude capital gains income, and therefore miss a large part of the increase in investment income, which is exceptionally concentrated among high-income people.(2))
Government policies at both the federal and state levels have had an impact on the distribution of income. While government policies may not be able to reverse the economic forces that have led to increased income inequality, it is possible for labor policies and government programs providing assistance to low- and middle-income people to impact the distribution of income. Tax policies also can mitigate the effects on families of the pre-tax income distribution.
Labor policies can affect the distribution either directly or indirectly.
Dramatic changes in the cash assistance programs serving needy families with children have also contributed to increasing income inequality and will likely have an even greater impact when the new welfare reform law has been implemented fully. Over the period between the late-1970s and the mid-1990s, benefits provided under the Aid for Families with Dependent Children program fell in the majority of states. In the typical state, benefits for a family of three with no other income fell 40 percent between 1975 and 1996, after adjusting for inflation.
The analysis presented here uses pre-tax income. It does not reflect the effects of tax policies that influence the distribution of post-tax income. Nevertheless, federal and state tax policies influence how much income families have to spend and how disposable income is distributed.
States Can Choose a Different Course
State policy decisions in recent years have tended to widen the already growing gaps in the distribution of income. If they so choose, however, states can chart a different course.
Several states have enacted minimum wage rates above the federal level. A higher minimum wage would help reverse or moderate the decline in wages for workers at the bottom of the pay scale, serving to reduce income inequality. In addition, unemployment insurance has become less effective in maintaining income than in the past because a smaller share of unemployed workers now receive unemployment insurance. Efforts to strengthen the unemployment insurance system both at the national level and in many states can broaden the receipt of unemployment insurance among unemployed workers.
The new programs states are now implementing as part of the Temporary Assistance for Needy Families program, which replaced the AFDC program, can also impact the well-being of the states' poorest families. States that emphasize job placement, training, and the provision of supportive services such as transportation and child care may be less likely to see a deterioration in the well-being of poor families than states that emphasize harsh sanctions and very short time limits.
State tax reform efforts can help offset the trend toward increasing income inequality. States looking to reduce taxes can focus their efforts on reducing regressive taxes such as sales taxes, rather than cutting their more progressive income taxes, and thereby spread more of the benefits of the tax cuts to low- and middle-income families. Similarly, states that must raise taxes can concentrate income tax increases on the most affluent. States also can reduce or eliminate tax breaks primarily benefitting the well-off. In addition, states can help shield the poor from being taxed deeper into poverty through the creation of low-income tax credits.
Making state tax systems less regressive is important for other reasons as well. A highly disproportionate share of the income growth in recent years has gone to upper-income households. As a result, state tax codes that rely too heavily on taxing the poor and the middle class and too lightly on taxing the wealthy may find their resource growth insufficient to keep pace with the demand for services the next time the economy heads into a downturn.
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, however, state as well as federal policies will have to play an important role.
Over the past several years, the U.S. economy has experienced a prolonged period of economic growth. By the third quarter of 1997, the unemployment rate had dropped to 4.7 percent, the lowest rate since the early 1970s. Despite the current economic expansion, a longer view underscores some troubling and ongoing developments. The incomes of the country's wealthiest families have increased substantially over the past two decades, but middle- and lower-income families have seen their incomes either stagnate or fall. This trend of rising inequality in the United States as a whole has been well documented by Census Bureau and Congressional Budget Office data and by a large number of analysts. Few analyses, however, have focused on how income inequality has changed within the different states and regions of the country.
This report examines trends in the distribution of income from the late-1970s to the mid-1990s in each of the 50 states. The analysis finds that in the vast majority of states, the gap between the incomes of the richest families and the incomes of middle-class and poor families has grown substantially over the period.(3)
The report also finds that even the economic expansion of the past several years has not altered the long-term trend. Rather, an analysis of the changes in income inequality since the mid-1980s (a period comparable in the economic cycle to the current period) shows that in three-fourths of states, the gap between high-income and low-income families continued to grow over the past decade. Moreover, in nearly every state, the gap between high-income and middle class families increased since the mid-1980s.