Wall Street Journal - January 18, 2000
Income Gap Broadens Amid Boom; Disparity of Wages Varies by State
By CONSTANCE MITCHELL FORD and PATRICK BARTA Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- It is an old adage that has picked up new life during the booming U.S. economic expansion: The rich get richer.
But in what states are the rich getting richer the fastest? For the answer, think Wall Street and high technology. A study scheduled for release Tuesday by two Washington think tanks, the Economic Policy Institute and the Center on Budget and Policy Priorities, found that while the income gap between rich and poor widened for the U.S. as a whole during the 1990s, the size of the gap varied sharply by state.
The study, titled "Pulling Apart: A State-by-State Analysis of Income Trends," found that during the late 1990s, the average income of all families in the top 20% of income distribution was $137,500. That was more than 10 times as large as the poorest 20% of families, which had an average income of $13,000.
But in nine states -- New York, Arizona, New Mexico, Louisiana, California, Rhode Island, Texas, Oregon and Kentucky -- the average income of the richest fifth of families was more than 11 times as great as the average income of the bottom fifth of families.
Many Reasons for Gap
The study cited many reasons for the disparity in these states, including the decline of manufacturing employment, rising immigration and reduced union activity -- trends that made it difficult for the working poor to gain ground. The booming stock market, meanwhile, helped enrich America's wealthiest families. But the authors of the report, as well as other economists, said the income disparity mainly reflects wide differences in wages between professional workers and low-skilled workers.
"The wealthy populations in states [such as New York and California] are doing very well," said Mark Zandi, chief economist at Dismal Scientist, an economic-consulting firm in West Chester, Pa. But these states also have "large populations of people with low education and low skills," he said.
The authors of "Pulling Apart" note that wages for low-income workers rose between 1996 and 1998, mostly because of a tight labor market and a strong economy, those gains were tiny compared with the enormous gains enjoyed by professional workers in financial services, entertainment, high technology and other high-paying industries.
Consider New York. According to Frank Mauro, executive director of the Fiscal Policy Institute in Albany, N.Y., which helped compile the study, New York's securities industry directly accounts for only 2.2% of jobs in the state but was responsible for 58% of the growth in gross state product -- the annual output of a state's goods and services -- from 1992 to 1997. Bonuses paid to Wall Street workers in New York doubled to $12 billion in 1999 from $6 billion five years ago.
On the other end of the income spectrum, New York was one of the few high-income states in the U.S. that had a minimum wage below the federal level of $5.15 an hour. The New York minimum wage was $4.60 an hour until Jan. 1, when it was raised to $5.15 an hour. The average income of the poorest fifth of families in New York fell between the late 1980s and the late 1990s to $10,769 from $12,740.
Mr. Mauro said if capital gains were included, the income gap in New York would be even wider, since capital-gains income in New York rose to $49 billion in 1999 from $12 billion in 1994.
"What's happening in New York is what's going on nationally. It's just more extensive in New York," he said.
Poor Wages at the Bottom
A look at the states with the narrowest income disparity -- Utah, Indiana, Iowa, North Dakota, Colorado, Alaska and Maine -- seems to indicate the income disparity has as much to do with poor wages at the bottom as it does with big gains at the top.
The poorest families in Utah, which had the narrowest income gap of all states, had average income of $18,174 between 1996 and 1998. Colorado had the highest average income of poor families: $18,450. That is substantially higher than bottom incomes in New York ($10,769) or New Mexico ($8,720), which had the lowest average income of poor families.
The study found the income gap narrowed significantly in only three states during the 1990s: Alaska, Tennessee and Louisiana -- though the gap in Louisiana still is among the widest.
The District of Columbia, which had the lowest average bottom income of $7,498 and highest average top income of $203,110, had a wider gap than any state.
The study uses pretax income data for families taken from the Census Bureau's Current Population Survey. The data, which are adjusted for inflation and are expressed in 1997 dollars, don't include noncash benefits, such as food stamps. They exclude capital gains but do include dividend and interest payments.
Some Question the Findings
Some economists question the findings of income-inequality studies. Some have noted the studies don't account for mobility in the lower classes -- that is, the fact that despite persistent wage inequalities, many families are able to move out of the lower classes each year. The authors of "Pulling Apart" cite studies by other researchers that show most poor families don't move into higher income categories, the major exception being families that include recent college graduates.
Meanwhile, economists Robert Rector and Rea Hederman of the conservative Heritage Foundation argued in a study last September that the census data commonly used in income studies are flawed. Specifically, they maintained the census income data don't include the value of some welfare benefits such as food stamps, or the equalizing effects of taxation. Moreover, they said, the Census data overlook the greater number of hours wealthy Americans work than low-income Americans and compare groups that are unequal in size.
Jared Bernstein, a labor economist at the Economic Policy Institute and one of the authors of "Pulling Apart" said, if anything, their analysis understates the income gap because it doesn't include capital-gains income, which has been enourmous for the high-income families who have invested in the stock market.
The organizations that prepared the study are left-leaning nonprofit think tanks in Washington that are pushing for changes in the tax law and other federal policies to benefit low and moderate-income families.