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Income Inequality

To many observers, the American economy has been in a constant upswing since the recession earlier this decade and continues to be the robust monster it was during the 20th century.

But beneath the surface, all the impressive economical numbers mask the struggles of ordinary workers. Recently, two think tanks, the Center on Budget and Policy Priorities and the Economic Policy Institute, concluded that the income gap between the richest and poorest one-fifth of families is "significantly wider" than it was two decades ago.

The middle class has not seen the benefits of this robust American economy. Last September, the median income level had remained flat at $44,389, a figure that represented a 3.8% decrease from its peak in 1999. In 2005, the median income, when adjusted for inflation, actually declined, a trend that has continued since 2001. Since the 1970s, as the income for the wealthiest 1% of Americans has doubled, earnings for middle-class households have remained even, but this is only after adding a second wage-earner—an average of 500 annual work hours per household. Workers with college degrees, once considered more elite workers, have witnessed this wage stagnation, as earnings of workers with four-year college degrees fell 5.2% when adjusting for inflation from 2000 to 2004.

For poor Americans, the numbers are even more dismal. Last year, the poverty level increased to 12.7%, the fourth straight annual increase. There were 4 million more people living in poverty in 2004 than in 2001. From 2001 to 2004, as the median net worth of American households increased by a modest 1.5%, for the poorest one-fifth of Americans, the median household net worth actually declined 11%. In that same time period, the wealthiest 10% of Americans saw their median household net worth increase by 4%.

Young workers have been particularly hard hit by the growing economic asymmetry. Between 2001 and 2004, the median income for households under 35 fell 8% after adjusting for inflation, while households between age 35-44 saw their median income fall 9%. Meanwhile, workers age 45-54 saw their median incomes rise 23%.

Despite the fact that wages had their fastest growth in 3 years last year, wages continue to trail inflation. Last year, the total compensation paid to workers increased by only 3.1%--the smallest increase since 1996. Factoring in inflation, which grew by 3.5%, overall compensation actually fell by 0.3%. Compare those numbers with the gaudy 25% increase in median pay among chief executives of the country’s 100 largest companies last year.

As for this year, employers are expected to increase base salaries by 3.7% for both this year and in 2007. Meanwhile, fueled by increased energy prices, the Consumer Price Index is on pace for a 4.7% rise this year. Overall, the share of national income going to wages and salaries is at its lowest level since 1929. Remember what happened that year? While productivity has grown more than 3% annually since 2002, wage increases, adjusted for inflation, have risen less than half a percentage point, with most of that money going into corporate coffers.

Although many states have increased their minimum wages and Congress discussed raising the federal minimum, the federal minimum wage has remained stagnant at $5.15 for nearly a decade. A full-time employee working for the federal minimum will earn $10,712 a year, which is just $1,000 above the official poverty level of $9,654. As a point of reference, top corporate executives make, on average, 431 times that amount in salary. The average chief executive made $11.3 million last year, an increase of 27% from the previous year, while the median salary for a chief executive was $8.4 million. The minimum wage, adjusted for inflation, peaked in 1968 at a rate of more than $9 measured in today’s dollars—almost double it current value.

Meanwhile, healthcare costs continue to grow faster than the economy. The average American’s tab for healthcare in 2004 was $6,280, a whopping 7.9% increase from the previous year. In 2004, health care costs increased to 16% of the GDP, up from 13.8% in 1993 and 9.1% in 1980. Prescription drug prices increased by 8.2% from the prior year; insurance premiums increased by 8.6%; consumer out-of-pocket spending increased 5.5%.

As of mid-August, the average cost of gasoline in the U.S. had risen 12.5% in the past year, to $2.91 per gallon. Not too long ago, in 2004, gas prices hovered around $1.70 per gallon for a time.

Meanwhile, tuition at four-year private universities has increased by 30% since 2000, with an average cost of more than $42,000 per year. At a public university, the average cost has risen 56% in that time frame. Federal student loan debt has tripled in the past decade, with $85 billion in loans being taken out last year. The overall median value of household debt rose 33.9% from 2001 through 2004, to $55,300. And while many critics may blame that debt on Americans' infatuation with luxury items, a recent analysis has shown that it’s the basic expenditures—housing, health care, and education—that are driving people into debt.

So, that’s the bad news. The good news? President Bush’s recent appointment to the Treasury, Henry Paulson, has addressed the issue of growing inequality, making it one of his top priorities in the office.