Economic Mobility Increasingly Difficult Because of Income Inequality

 @ashleyportero on November 15 2012 12:15 PM
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A combination of wage inequality, the surge in investment income and cuts to social safety net programs is making it even harder for low-income Americans to pull themselves up by their bootstraps. Reuters

The income gaps between the richest households and low-to-middle income households widened considerably in most regions of the U.S. since the late 1990s, a trend demonstrating that wage inequality has been skyrocketing across the nation for years – and it can’t be blamed on the Great Recession.

Across all states, the highest-earning one-fifth of households had an average income ($164,490) eight times higher than the lowest-earning fifth ($20, 510) in the late 2000s, according to a new report from the Center on Budget and Policy Priorities and the Economic Policy Institute. An analysis of U.S. Census Bureau data found that the wealthiest Americans across all states have seen their incomes steadily increase between the late 1990s and mid-2000s, just as the poorest saw an almost 6 percent drop in their earnings.

Meanwhile, incomes grew at an even faster rate – 14 percent – among the top 5 percent of households, while the middle fifth only saw a 1.2 percent increase.

“Prolonged growth in income inequality undermines the basic American belief that hard work should pay off,” said Elizabeth McNichol, co-author of the report and senior fellow at the CBPP. “Anyone who contributes to the nation’s economic growth should reap the benefits of that growth. But for decades now, those benefits have been skewed in favor of the wealthiest members of society.”

The study did not analyze the effect of the recent recession on income inequality because of “unemployment and stock-market fluctuations from the ongoing, longer-lasting changes in the economy that have widened... The longer-term structural effects will be clearer when the economy reaches its next peak, but there is strong evidence that inequality continues to grow.”

More Inequality Among Rich, Middle Class

There have been several reports indicating income inequality has been rising on the national level for decades, including well-documented data from the Congressional Budget Office. But a comparison of individual states and regions in the most recent analysis shows the spike in wage inequality that has occurred since the 1970s has not been a geographically-isolated phenomenon. A huge majority of states have seen the wage gap rise not only between the highest and lowest earning families, but also between the wealthy and middle class.

It certainly is not isolated: The states with the largest gaps between the richest fifth of households and the middle fifth (nationally, 2.7 times higher) are New Mexico, California, Georgia, Mississippi and Arizona. Those states also had some of the most significant wage gaps between the lowest and highest earning fifth, along with New York, Massachusetts and Illinois.

So just how is it that the top 5 percent of households have, in some states, seen up to a 162 percent increase in income while the bottom fifth have seen their wages rise by less than 27 percent (they actually fell in one state – Michigan)?

Through a combination of wage stagnation and inequality, government actions – and inaction in some cases – on the federal and local level, and an expansion of investment income (such as dividends and capital gains) subjected to little or no taxation, according to the report. All of those factors have made it even more difficult for low-income families to break out of the cycle of poverty, since children from those households are less likely to complete a high school and college education.

“Studies show that most low-income families have low incomes for many years. Recent studies have found that in the short term, workers in the bottom fifth of the income distribution experience very little income mobility. For example, 71 percent of households that were in the bottom fifth in 2001 were still in the bottom fifth two years later,” according to the CPBB.

Poor women are also less likely to have access to reproductive health care, a factor that can ultimately have severe economic impacts for women because it increases their likelihood of experiencing unplanned pregnancies.

How To Improve Economic Mobility

The study authors report that investing in government safety net programs that aid the poor, such as unemployment insurance and Medicaid, can help mitigate the growth in inequality by ensuring lower-income families are not financially ruined by events such as job losses and expensive medical bills.

Changes to state and local laws are also key to encouraging economic mobility. For instance, the CBPP recommends states should rely less on sales taxes and user fees, and more on progressive income taxes,  to generate revenue since the former hit middle and low-income households especially hard.

Investment in programs supporting child care, transportation and public education can also push back against growing income inequality.

In particular, a strong public school system can act as bridge between families of all economic backgrounds by enhancing their sense of community and shared interests, according to the report.

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