Pulling Apart: A State-by-State Analysis of Income Trends (EPI study, 2000)
By Jared Bernstein Lawrence Mishel Elizabeth McNichol
January 1, 2000

January 2000 | EPI Study

Pulling Apart
A state-by-state analysis of income trends

by Jared Bernstein, Elizabeth C. McNichol, Lawrence Mishel, and Robert Zahradnik

Executive Summary
Despite the strong economic growth and tight labor markets of recent years, income disparities in most states are significantly greater in the late 1990s than they were during the 1980s. The average income of the lowest-income families grew by less than one percent from the late 1980s to the late 1990s a statistically insignificant amount. The average real income of middle income families grew by less than two percent, while the average real income of high income families grew by 15 percent.

The small growth in the incomes of low-income families over the last decade was, not enough to make tip for the decline in incomes during the previous decade. Nationwide, from the late 1970s to the late 1990s, the average income of the lowest-income families fell by over six percent after adjustment for inflation, and the average real income of the middle fifth of families grew by about five percent. By contrast, the average real income of the highest-income fifth of families increased by over 30 percent.

The trend has been widespread. Income disparities between the top fifth of families and families at the bottom and the middle of the income distribution grew substantially in almost every state over the past two decades.

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

Income inequality increased in all states but four over the last two decades
In 46 states, the gap between the income, of the richest 20 percent of families and the incomes of the poorest 20 percent of families is wider than it was two decades ago.

• In 18 states high-income families got richer while the poor got poorer. In 31 states the incomes of high-income families grew faster than the incomes of low income families.
• In all but two states in the nation, the average income of families in the top 20 percent of the income distribution grew, after adjustment for inflation, between the late 1970s and late 1990s. In 3 1 states, the incomes of the upper fifth of families jumped by over 30 percent over the past two decades.
• Incomes of the poorest fifth of families, however, declined in 18 states between the late 1970s and the late 1990s. In some states, the decline was very steep. In I I states, the incomes of families in the bottom quintile of tile income distribution dropped by more than 10 percent. In four states Arizona, New Mexico, New York, and Wyoming the poorest fifth of families experienced a decline in income of more than 20 percent.

The differences in income growth since the late 1970s between high- and low- income families are seen to be even more pronounced when families in the top five percent of the income distribution are compared to the bottom fifth.

• In the eleven large states analyzed, the incomes of the top five percent of families increased by 35 percent or more between the late 1970s and the late 1990s. By contrast. in ten of these eleven states the incomes of the bottom fifth of families either declined (it grew very little between the late 1970s and late 1990s.
• In the eleven large states analyzed, the increases in the average income of farm lies in the top five percent of the income distribution ranged from $58,000 to over $111,000. In three states New Jersey New York. and Pennsylvania the increase was larger than $100,000, By contrast, the largest increase in average income for the bottom fifth of families in these states was only $1,300. In New York, for example. the average income of the top rive percent of families grew by $ 107,880 while the average income of the bottom 20 percent dropped by $2,900.

Middle-income families also lost ground. In 45 states, tire gap between the average income of middle income families and the average income of the richest 20 percent of families widened.

The average income of families in the middle fifth of the income distribution fell in 11 states between the late 1970s and the late 1990s. In all but three of these states, tire average income of the top fifth of families increased. In the other 39 states, 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.

Gap between high-income families and the poor and middle-class is wide
The resulting disparities between the incomes of high- and low-income families are substantial.

• In the United States as a whole. tire poorest 20 percent of families had an average income of $12,990 in the late 1990s, while the average income of families in the top 20 percent of the income distribution was $137,490, or more than 10 times as large. There were nine states New York, Arizona, Now Mexico. Louisiana, California, Rhode Island, Texas, Oregon. and Kentucky where the average income of the richest fifth of families was more than eleven times as great as the average income of the bottom fifth of families.
• In the late 1970s, there was no state where high income families had average income that was as much as 9.5 times larger than the average income of low-income families. By the late 1990s, 24 states had "top-to-bottom" ratios of 9.5 or greater. The increase in income disparities between the top and bottom fifths of families was greatest in New York, Arizona, Rhode Island, Oregon, California, New Mexico, West Virginia, Kentucky, Connecticut, and Kansas.

The gaps between the incomes of high-income families and middle-income families also were not always as large as they are in the 1990s.

• In the late 1970s. there was not a single state where the average income of families in the top quintile of the distribution was as much as 2.7 times as great as the average income of families in the middle quintile. By the late 1990s, there were 39 states where the gap was this wide.
• In the late 1990s, the gap between high-income and middle class families was the widest in 12 states - Arizona, New Mexico, New York, Oregon, Texas, California, South Dakota, Rhode Island, Florida, Kansas, Mississippi, and Louisiana - where the average income of the richest fifth of families was at least three times as large as the average income of the middle fifth of families.

The economic prosperity of the 1990s has not been shared equally
The long-term trend toward increasing inequality has continued over the past decade despite the economic growth of recent years. In only a handful of states was progress made toward reducing income inequality between the late 1980s and the late 1990s.

• Since the late 1980s, income inequality has increased in most states. In two-thirds of the states, the gap in incomes between the top 20 percent of families and the bottom 10 percent of families grew between the late 1980s and die late 1990s. In 15 states, the average income of families in the bottom fifth of the distribution fell while the incomes of those in the top fifth grew.
• By contrast, the gap in income between the top 20 percent of families and the bottom 20 percent narrowed significantly in only three states - Alaska, Louisiana, and Tennessee.

Since the late 1980s. the incomes of very high income families the richest five percent of families a grew dramatically while the incomes of the poorest families declined or stagnated.

• In nine of the 11 large states analyzed, the average income of the poorest fifth of families declined or grew very little since the late 1980s, while the incomes of the top five percent of families grew by more than 15 percent. In five of these states - Michigan, New York, Ohio, Pennsylvania, and Texas - the incomes of the top five percent grew by more than 30 percent.
• The greatest increase in average income for the poorest families in the 11 large states was $1,490 in Michigan. The increases in the average income of the top five percent of families ranged from $32,690 in Illinois to $67,680 in Pennsylvania.

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

• In close to three-fourths of the states, the ratio of the incomes of the top fifth of families compared to the middle fifth of families increased between the late 1980s and the late 1990s. Income disparities between the top and middle fifths of families increased most in Arizona, followed by Oregon, South Dakota, Rhode Island, Kansas, New York, Connecticut, New Hampshire, Nevada, and Maryland. By contrast, the top to middle ratio did not decline significantly in any state.
• On average in the United States, the share of income held by the middle fifth of families fell from 17.2 percent to 16.2 percent of total income, while the share held by the richest fifth of families increased from 42.1 percent to 45.4 percent of total income. Since the late 1980s, the share of income held by the middle fifth of families has fallen in 44 states. Over the same period, the share of income held by the fifth of families with the highest incomes grew in all but four states.

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 declined over 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 globalization, the decline of manufacturing jobs and the expansion of low wage service jobs, immigration, and the weakening of labor market institutions the lower real value of the minimum wage and fewer and weaker unions. These factors have led to air erosion of wages for workers with less than a college education approximately the lowest-earning four-fifths of the workforce.

In the last few years, persistent low unemployment, an increase in the minimum wage and fast productivity growth have fueled real wage gains at the bottom. As a result, there has been a lessening of wage inequality at the bottom while the gap between middle- and high-wage workers continues to grow. However, even the recent wage growth for low-wage workers has not been sufficient to counteract the two-decade long pattern of stagnant or declining wages.

Besides wages, the other major source of income is investment income such as dividends, rent, interest and capital gains. Since investment income primarily accrues to those at the top of the income structure, recent expansions of investment income have led to greater income inequality. (This report captures only some of the effects of these investment income trends because the income measure used in this report includes only a portion of investment earnings. It does not include income from capital gains.)

Another factor that explains some of the increased income inequality is the increase in the number of families headed by a single person. These families generally have lower income than two-earner families.

Government policies both what wage 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 the social safety net, the failure to have effective labor laws regulating the right to collective bargaining, and a minimum wage that has declined in real terms have all contributed to growing wage inequality. In addition, changes in federal, state and local tax structures and benefit programs have, in many cases, accelerated rather than moderated the trend toward growing inequality emerging from the labor market.

States can choose a different course
One consequence of the nation's prolonged economic recovery is that tax revenue has been growing at a faster rate than originally projected in most states, leaving states with surplus revenues. The strong economy also has played a part in reducing public assistance caseloads in many states. As a result, the current economic expansions provide state budget-makers with the resources to mitigate some of the growing inequality through state policies.

States have long played a major role in the establishment of labor market policies such as rules governing the formation of unions, the design of the unemployment insurance system, and the establishment of state minimum wages, all of which affect income inequality.

The minimum wage, for example, has a direct hearing on individual earnings. The value of the federal minimum wage has fallen considerably since the late 1970s. One way that policymakers could help reverse or moderate the decline in wages for workers at the bottom of the pay scale would be to enact a higher minimum wage. Ten states have compensated for the decline in the value of the federal minimum wage by establishing higher state-level minimum wage standards.

Since the 1970s, unemployment insurance protection has eroded as a result of both federal and state-level cutbacks. The proportion of jobless workers receiving unemployment insurance benefits has declined in recent years. These cutbacks have affected both middle- and low-income families. Efforts to strengthen the unemployment insurance system both at the national level and in many states are warranted in order to broaden the receipt of unemployment insurance among unemployed workers.

Changes in programs that provide assistance to low-income families have contributed to the increase in income inequality and will likely continue to exacerbate the trend towards increasing inequality in the coming years. In the typical state, cash assistance benefits for a family of three with no other income fell 40 percent between 1975 and 1996, after adjusting for inflation. In addition, in every state, receipt of cash assistance has declined dramatically. Studies indicate that between one-half and three-quarters of former welfare recipients are employed shortly after they leave the rolls. However, significant barriers it) obtaining and keeping steady work remain for many families, and these barriers are likely to retard income gains for the lowest income fifth of families.

There are a host of options state policymakers can consider to strengthen their social safety nets including the provision of supportive services such as transportation, child care, and health insurance coverage to low-wage workers. States can also provide intensive case management and a range of services to help current and former welfare recipients to maintain their present employment, move into better jobs, or obtain the education and training needed for career advancement.

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. The overall effect of the federal income tax system is to narrow income inequalities, In recent years, expansions in the earned income tax credit have helped to increase the after-tax income of low-income families with children. However, the tax system more generally has become less progressive over the past two decades; changes to the federal tax code made in 1997 exacerbated this trend.

While the federal tax system as a whole remains progressive, nearly all state tax systems are regressive. States rely more on regressive sales taxes and user fees than on progressive income taxes and. therefore, take a larger percentage of income from low- and middle-income families than from the wealthy. In the past few years, when many states have sought to cut taxes, nearly all have chosen to make the vast majority of the cuts in then progressive income taxes, rendering their tax systems even more regressive.

In order to narrow the gap between high- and low-income families, states can institute tax reforms that are progressive in nature and improve the after-tax distribution of income. For example, states can increase their reliance on income taxes rather than sales taxes by cutting sales tax rates rather than income tax rates. States can also make their income tax systems more progressive by enacting tax credits targeted to low-income taxpayers or by raising personal exemptions or standard deductions. Another way to lessen the relative impact of state tax systems on the poor while cutting taxes is to exempt food front the sales tax base. One direct way that states can use tax policies to raise income from work for their poorest residents is to enact state earned income tax credits.

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, state as well as federal policies will have to play an important role.