Income Trends 4: Causes Contributing to Income Gaps

This continues our series describing the causes and consequences of the income gap

Income gaps affect families in upper, middle, & lower incomes. Income in the top 5% rose between the late 1970s and mid-2000s by more than $100,000 (adjusting for inflation). By contrast, the largest increase in the bottom fifth was $5,620. In the 1970s incomes for the top 5% were 2.5 times the middle 20%, by the 2000s they were more than 4 times as much. Pulling Apart a State-by-State Analysis of Income Trends declares “Several factors have contributed to the large and growing income gaps in most states.”

Growth in wage inequality has been the biggest factor 

• “Wages at the bottom and middle have been stagnant or grown modestly for 30 years. 
• Wages of the very highest-paid employees have grown significantly.
• Over the last 30 years, the nation has seen
  • Increasingly long periods of high unemployment
  • More intense competition from foreign firms
  • Shift in the mix of jobs from manufacturing to services
  • Advances in technology that have changed jobs. 
  • Share of workers in unions also fell significantly.
• Today, inequality between low- and high-income households — and between middle- and high-income households — is greater than it was in the late 1970s or the late 1990s.”

Government Policies 

“Government actions — and, in some cases, inaction — have contributed to the increase in wage and income inequality in most states.  Examples include

• Deregulation and trade liberalization
• Weakening of the safety net
• Lack of effective laws concerning the right to collective bargaining
• Declining real value of the minimum wage
• Changes in federal, state, and local tax structures and benefit programs have accelerated the trend toward growing inequality.”

Expansion of investment income. 

• “Forms of income such as dividends, rent, interest, and capital gains, which primarily accrue to those at the top of the income structure, rose substantially as a share of total income during the 1990s.
• Large increase in corporate profits during the economic recovery after the 2001 recession also widened inequality by boosting investors’ incomes.”

Wednesday we review the impact of higher education on income trends and gaps