Who’s Grabbing All the New Pie?

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Snapshot for August 1, 2007.

Who's Grabbing All the New Pie?

by Lawrence Mishel

A common metaphor for describing total national income is the image of a pie—when that pie is cut, some households get larger slices than others. How has that pie been divvied up in the current recovery?

Economic growth in the current recovery has been very unbalanced, with all of the income growth from 2001 to 2005 (the latest available data) accruing to the upper 5% and, in particular, the upper 1% of households. In fact, the bottom 90% of households experienced a 4.2% decline in their market-based incomes1 (see the March 28, 2007 Snapshot), representing a loss of $1,293 per household on average from 2001 to 2005 (the latest year data is available). Had income growth been shared equally during this recovery, the bottom 90% would have been $2,071 better off than they actually were in 2005 (with a $778 income gain, instead of a loss).

The change in income shares between 2001 and 2005 is illustrated in the chart below. Since the beginning of the recovery in 2001, the income share of the top 1% grew 3.6 percentage points to 21.8% in 2005, greater than the 16.1% income share of the entire bottom half of all U.S. households. Correspondingly, the income shares of the bottom half and the upper-middle class dropped, respectively, by 1.4 and 2.3 percentage points. As a result, the top 1% of households gained $268 billion of total income and the bottom 90% lost $272 billion since 2001.

The increased inequality from 2001 to 2005—during a recovery no less—caused the bottom 90% of households to lose income (-$2,071) while the best-off 1% of households gained $183,902 on average.

Sources
Congressional Budget Office (2006, at http://www.cbo.gov/ftpdoc.cfm?index=7718&type=2 ), Piketty and Saez (2007, update at http://elsa.berkeley.edu/~saez/TabFig2005prel.xls ), and author's calculations. We apply the CBO income shares of the bottom half and the 50-90th percentile group in 2001 and 2004 to the Piketty and Saez shares for the bottom 90% (using the assumption that the middle fifths income is split evenly between the top and bottom halves) in 2001 and 2005, respectively.

Note
1. Market-based income excludes government transfers.