Income Inequality Costs The Middle Class $18,000 A Year

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The growth of income inequality between 1979 and 2007 has reduced middle-class incomes by $17,890 a year, or about 23 percent, according to a new paper from the Economic Policy Institute (EPI). “In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007,” author Elise Gould writes.

The paper notes that during that time period, income for more than 90 percent of American households grew more slowly than average income growth. That’s because the average was skewed by fast growth at the top: Income growth for households between the top 96th and 99th percentiles grew by more than 78 percent, and the top 1 percent’s income growth was a whopping 245 percent. That last figure is nearly five times as fast as overall average income growth during that time period.

“[T]he rise of inequality explains the vast majority of the deceleration in middle-class income growth relative to earlier periods, particularly the first three-plus decades following World War II, when prosperity was broadly shared,” Gould writes. “[T]his rise in inequality is by far the most important determinant of the slowdown in living standards growth over the past generation, and it has been enormously costly for the broad middle class.”

Part of the story is that wage growth has been disconnected from workers’ growing productivity. “If wages of the bottom 99 percent had kept pace with productivity growth for the past generation, as was the case in the preceding generation, then most of the increase in income inequality would not have been possible,” Gould notes. Productivity grew by about 65 percent between 1979 and 2013, but hourly compensation for workers, not including supervisors and managers, grew by just 8 percent. That means productivity grew eight times faster than workers’ compensation.

The top 1 percent, on the other hand, got a 154 percent raise in wages over the same time period, far more than the growth in productivity and more than four times more than average wage growth.

These trends continue today. For the bottom 70 percent of earners, wages are lower than when the recession began in 2007, and everyone’s wages are lower than at the end of the recession in 2009. Meanwhile, between the first half of 2013 and the first half of this year, all groups except the bottom 10 percent saw real hourly wages fall.

The two-cent increase for the lowest income workers is likely due to state-level minimum wage increases, the paper notes. Their wages grew by 0.9 percent in states that raised their minimum wages, while they fell 0.1 percent in those without a wage hike. Ten states have increased their wages since the beginning of this year.

It’s worth noting that even though EPI’s report uses a comprehensive measure of income — including wages and salaries, capital gains and business income, non-cash income like employer coverage of health insurance premiums, and government programs like Social Security and food stamps — accurate measurements of the wealthiest are hard to make. That’s because the 1 percent hides wealth in tax shelters, foundations, and holding companies and often don’t respond to questionnaires. Even so, it’s clear that income inequality has risen alongside wealth inequality — the latter is as bad as it was in the 1920s.

Income inequality is not just hurting low-income and middle-class people, either. Many have warned that it’s undermining economic growth, from the International Monetary Fund to academics to people on Wall Street. It’s also hurting our health, safety, and political system.