September 2000 Briefing
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Any way you cut it
Income inequality on the rise regardless of how it's
- by Jared Bernstein, Lawrence Mishel, and Chauna
- The Economic Policy Institute and the Center for
Budget and Policy Priorities recently published a joint report called
Pulling Apart: A State-by-State Analysis of Income Trends
(Bernstein et al. 2000), which showed that income inequality-the gap
between those at the top, middle, and bottom of the income scale-has
grown significantly throughout the past two decades and remains higher
than at any other time in the post-war era.
This report was by no means the first to make
these observations. Since inequality began climbing sharply in the
1980s, it has become the focus of much research in
economics. Nevertheless, the report, which also examined the growth of
inequality at the state level, reminded those interested in this issue
that inequality continued to grow, albeit more slowly, in the
much-praised "new economy" of the 1990s.
- While the methods and findings of the report were
widely accepted, some criticisms were raised that need to be addressed.
Some of the report's critics simply missed the central point of the
study - that income inequality has increased significantly over the
past two decades. The weakest of these critiques, such as the one by
Alan Reynolds from the Hudson Institute, ignored a key issue-that the
analysis was measuring a trend-and simply argued that there are
different ways to measure inequality at a certain point in time
(Reynolds 2000). For example, Reynolds' article points out that families
with more workers earn more than those with fewer, and that those with
more education and experience earn more than those with less. Similarly,
an analysis by the Heritage Foundation shows that different income
definitions, such as pre- versus post-tax, lead to different levels of
inequality at a point in time (Rector and Hederman 1999). Again, these
types of analyses reveal nothing about the key question of whether
inequality has increased over time. As we show below, no matter
which income definition is applied, the finding of increased inequality
- A second group of critics accepts that inequality
has risen over time but argues that its increase has been offset by
income mobility in the U.S. economy. An assertion in this argument holds
that, while the income gap may be wider now than in the past, the poor
are better off than ever before. Neither claim withstands close
- A third and final category of critiques more or
less accepts the findings but suggests that increased income inequality
is simply unavoidable. These critics claim that increased inequality is
simply the inevitable outcome of a growing economy in which
globalization and technology lead to higher rewards for the winners and
bigger losses for the rest. We address this interpretation in the
- Do different income definitions yield different answers?
Studies in income distribution, as in all
areas of empirical work, have to be careful and complete in how the
items being analyzed are defined. More specifically, it is important to
ensure that any conclusions drawn from a data analysis are not sensitive
to particular measurement choices.
- In both the recent Pulling Apart and in
The State of Working America 2000-01 (Mishel et al. forthcoming),
we have employed the same definition of income used by the Census Bureau
when it analyzes the primary source on income distribution, the income
supplement to the March Current Population Survey. The Census Bureau
itself produces measures of poverty and income distribution using a
variety of income definitions so that analysts can assess the
sensitivity of measured trends to changes in definitions. We use these
Census Bureau data as well as Congressional Budget Office income
distribution data to assess whether any of our conclusions are
determined by our decision to use the official Census Bureau measure of
- Before elaborating on why the measurement choices
did not affect the conclusions we reached, it is important to be clear
about the questions we asked in our research. As discussed above, our
research has measured the changes in income for the range of income
groups (low, middle, and high income) as well as the change in income
inequality. Our conclusions, therefore, were about trends in
income and income inequality. So the measurement question is whether
differing definitions of income yield different trends in income
growth and inequality. We show below that they do not. We agree (and
document) that analyses using different income measures will result in
different levels of inequality at a specific point in time (e.g.,
examining a single year). What is important to note, though, is that
studies using comparable measures of income inequality demonstrate that
income inequality in the U.S. is now historically high, and high
relative to other advanced countries. 
A review of a wide array of income measures
• Income inequality grew quickly in the 1980s
and continued to increase at roughly a third to half as fast in the
• Income growth at the bottom of the income
distribution was modest in the 1990s and, for some income definitions,
even fell. Middle-class family income growth in the 1990s, as a whole,
was also modest, notwithstanding recent rapid growth.
- Despite recent improvements, a longer-term view of
the economy reveals that income inequality has grown substantially from
1979 to the present. This increase has been accompanied by only modest
income growth for most families, especially relative to the overall
productivity gains over these 20 years.
Census Bureau Alternative Income Definitions:
We first turn to an analysis of the various household income
measures produced by the Census Bureau. We have selected four of the 15
available measures for analysis so that we can identify how results change
as incomes become more comprehensively measured and as changes in the tax
system are integrated (see box below). The first measure is the official
Census Bureau money income definition, which includes all labor and
self-employment income, government cash assistance, pensions, interest,
dividends, and other money income. The limitation of this definition is
what it excludes: any effect of the tax system, employer-provided health
benefits, realized capital gains (i.e., gains from selling assets such as
stocks), and the value of government non-cash programs (housing subsidies,
Medicaid/Medicare, food stamps, etc.). The second definition we have
selected is pre-tax market income, obtained by subtracting
government cash assistance from money income and adding in realized
capital gains and employer-provided health insurance. The third definition
measures after-tax market incomes. The final measure,
comprehensive income, is the broadest and adds the value of
government cash transfers, health programs (Medicare/Medicaid), food
stamps, and school lunch programs.  All of the
published Census data, regardless of definition, suffer from the problem
of "top-coding, which results from the fact that income above a certain
level (affecting about 1% of families) is not reported by the Census
Bureau because of confidentiality concerns. Consequently, the income of
the top income group is under-reported and reported to a different degree
in different years. In Pulling Apart and in The State of Working
America we present data that adjust for top-coding so as to have a
consistent income series.
Alternative income definitions|
Money income: The Census
Bureau's official definition of income used to compute income and
poverty trends. This definition combines all labor income (wage
and salary and self-employment), all government cash transfers
(unemployment insurance, Temporary Assistance for Needy Families,
Social Security), pensions, alimony, rent, interest, dividends,
and other money income. This definition does not take account of
non-cash government assistance (e.g., Medicaid), taxation, and
Market income, pre-tax: This definition adjusts money income by subtracting
government cash assistance and by adding market incomes excluded
from the official definition: employer-provided health insurance
and realized capital gains (gains from selling assets such as
stock). Thus, this definition includes only income generated by
Market income, after-tax: This definition adjusts market income to an
"after-tax" basis by subtracting estimates of federal income and
payroll taxes, the EITC, and state income taxes. There is no
adjustment for other federal (corporate, excise), other state
(sales) taxes, or any local taxes.
Comprehensive income: This definition
adds the value of government assistance to income. It includes
both cash assistance (Social Security, unemployment insurance,
etc.) and the value of various subsidies and programs, such as
housing subsidies, food stamps, school lunch programs, and health
programs (Medicare/Medicaid). This definition is thus the most
comprehensive in including both market income and government
assistance as well as adjusting for most
- There are reasons to favor or reject particular
income definitions. However, the important point is that, although
differing definitions yield a wide variation in the amount of inequality
measured in a given year, all the definitions show a similar income
inequality trend over the 1980s and the 1990s. Table 1 presents
several measures of inequality for each definition of income for the
years 1979, 1989, and 1998, and the percent growth over time. The top
panel employs the Gini coefficient, a widely used measure of income
inequality. There is a persistent and comparable growth of inequality
since 1979 for every income definition, with the growth of income
inequality ranging from an increase of 30% to 40% in the 1990s in
comparison to the 1980s. For instance, over the 1979-98 period the Gini
coefficient grew 10.7% for the first two income definitions and 12.8%
for the last two income definitions. Plus, the Gini coefficient grew
about 4% in the 1990s. This is incontrovertible evidence that,
regardless of definition, income inequality has grown in each of the
last two decades.
- The conclusions in Pulling Apart regarding
income inequality trends were based on the trends in two income ratios:
the incomes of the highest fifth in relation to the lowest fifth of
families and the incomes of the highest fifth to the middle fifth. We
also use the various Census Bureau definitions of income to compare the
sensitivity of the original findings. As the bottom half (family income
ratios) of Table 1 shows, income inequality both between the top and the
bottom and between the top and the middle grew persistently over the
1980s and 1990s, regardless of how income is measured. In fact, each
income inequality ratio grew roughly the same amount-around 25% on
average over the 1979-98 period for nearly every income definition
examined in Table 1. The inequality of market-based incomes grew the
fastest in the 1990s for both income ratios. Contrary to some analysts'
contentions, the income gap between the top and the bottom grew as
quickly with the official Census measure as it did with an after-tax
income measure, at least in the 1990s (11.7% versus 12.7%). Clearly
there is no basis to the claim that the Census Bureau's money income
measurement somehow distorts the trend in income inequality.
- The alternative Census Bureau income definitions
also can be used to examine the income growth of groups along the income
scale, as presented in Table 2. As the table shows, the income
growth over the 1989-98 period is roughly 2% for the lowest fifth,
regardless of income definition. Growth over the 1980s varied more
widely, particularly for money income, which grew less than market
income for the bottom fifth (reflecting the reduction in government cash
assistance). The key comparison-between Census money income and
comprehensive income-shows that, over the entire 1979-98 period, the
difference between the two measures for households in the the lowest
fifth was a growth rate of 4.9% (money income) and 9.8% (comprehensive
income). Note, however, that these differences are spread over a 19-year
period, yielding a difference in annual growth rates of only
0.25% and 0.49%. Needless to say, either rate represents very modest
- With respect to inequality, the difference in
growth rates between the top and the bottom using these two measures was
almost identical. For Census money income, the top fifth grew 33.8%, or
28.9% faster than the bottom fifth over the full period; when using the
comprehensive income definition, the difference between the lowest and
highest fifths was nearly identical at 28.4%.
- Growth in the middle income group does not vary
much across definitions for the 1980s but does vary by roughly seven
percentage points in the 1990s (a 0.6% decline for Census money income
versus a 6.7% gain for comprehensive income). Nonetheless, middle-class
incomes relative to the top or bottom grew comparably across definitions
(since each group shows somewhat more growth when comprehensive income
measurements are used).
- Congressional Budget Office (CBO) data: The
trends in the CBO's income distribution data (CBO 1998) provide another
opportunity to check how conclusions are affected by alternate income
definitions. Although the CBO's data are based on the Census Bureau's
Current Population Survey (CPS), the CBO excludes those with negative
income from the lowest fifth, corrects for top-coding problems, adds
realized capital gains, and arranges the data so that 20% of the persons
are in each fifth (rather than 20% of the households). The particular
strengths of the CBO data are that they allow an examination of the
impact of the federal tax system, including all federal taxes (the
Census Bureau estimates only income and payroll taxes and the earned
income tax credit), and within the upper fifth, the CBO includes the
income trends for the upper l%, upper 5%, and upper 10%. 
- Table 3 presents
the CBO data on the growth of pre-tax and after-tax household income.
The latest year of data is the CBO's projection for 1999. These data
(pre-tax household income at the top of Table 3) reveal that the groups
at the top of the income scale (the highest fifth) have done far better
than any income group in the bottom 80%. This was especially true in the
1977-89 period when the real income of the top 1% grew 63.2%, while the
income of the bottom 60% declined, and the income of the upper-middle
fifth grew only 1%. In the 1989-99 period, the income growth at the very
top was considerably slower (13.2%) but still stronger than the mostly
flat or falling incomes of the bottom 60%.
- For the entire 1977-99 period, the CBO data show
the income growth for the top 1% was 84.8% and 44.6% for the top 10%,
while the upper middle (the "fourth fifth") had 5.2% growth, equivalent
to a minimal 0.25% annual income gain. The entire bottom 60% of the
income scale lost ground over the last 20 years, with the income of the
poorest fifth falling 12.5% as income declined steadily in both
- With these disparities in income growth, it is not
surprising that the income gaps between the top and every other group
have risen in both the 1980s and the 1990s, according to the CBO.
Whereas the ratio of the incomes of the highest fifth to the lowest
fifth was 10.2 in 1977, it rose to 13.1 in 1989 and to 15.7 in 1999. The
gap between the highest 5% and the bottom fifth grew even more, from
18.6 in 1979 to 32.9 in 1999. The gap between the top and the middle
also grew substantially, with the top earning twice as much as the
middle in 1977 but two-and-a-half times as much in 1999.
- Do these patterns hold up if we take into account
changes in the federal tax system? We can look directly at this by
examining the data at the bottom of Table 3, which shows the changes in
the effective federal tax rates for each income group. Over the 1977-89
period, federal tax rates grew modestly for the bottom 40%, fell
slightly for the next 40% (the middle and fourth fifths), and were
reduced significantly for the upper fifth, especially the top 1% (whose
effective tax rates were cut by a quarter, from 37.3% to 28.1%). These
changes to the tax structure exacerbated, if only slightly, the income
declines of the bottom 60%. But these tax revisions substantially raised
the income growth of the upper 1%, shifting the 63.2% pre-tax income
growth rate to 87.2% after taxes. As a result, the top/bottom income
ratio grew 28% on a pre-tax basis but 33% on an after-tax basis. Thus,
tax changes in the 1980s, by reinforcing the inequality generated by the
pre-tax market distribution, led to an even greater increase in
- Changes in taxation in the 1990s, on the other
hand, were progressive, as taxes were lowered on the bottom 40% and
raised for the highest fifth, especially the upper 1% and 5%, with other
income groups seeing only slight shifts in taxes. In the 1990s,
therefore, the income inequality generated by the market, as seen in
pre-tax income trends, was partially offset by the increased
progressivity of taxes. Note, for example, that in the 1990s, the three
income ratios all grew about half as fast for after-tax income as they
did for pre-tax.
- Over the entire 1977-99 period, tax rates were
reduced for those both at the very top of the income scale (by 2.9% for
the top 1%) and for those in the bottom 40%. These changes served to
offset each other, and, as shown by the similar percent changes in the
income ratios in the 1977-99 period, overall inequality growth over the
last 20 years was much the same whether measured on a pre-tax or
- The reduction of market inequality by progressive
tax shifts in the 1990s has meant that the federal government has had to
increase its redistributive efforts in order to offset market forces. If
one wants to downplay the growing inequality of pre-tax incomes in the
1990s because after-tax income inequality grew less, then one must be
supportive of increased tax progressivity. However, many of those who
take comfort in after-tax trends actually opposed the increased tax
progressivity. Moreover, if market forces continue to widen pre-tax
income inequality, then even further increases in tax progressivity are
required to forestall a growth in after-tax income inequality. For
instance, a larger, broader Earned Income Tax Credit (EITC) would be
needed. Needless to say, such an agenda is not prominent among the
critics who downplay growing inequality.
- Table 4 presents
an additional tabulation of income trends from the CBO that adjusts
family income for family size.  This
adjustment is made so as to measure income relative to "needs," on the
basis that smaller families need less income than larger families, and
visa versa. Some analysts have suggested that the trend toward smaller
families means that income declines are less onerous. This line of
reasoning can be specious, though, since some households may not
increase their size (by marrying or having children) precisely because
of disappointing income growth.
- Nevertheless, it is worth assessing whether
adjusting family income trends for changes in family size affects our
conclusions regarding trends in incomes and income inequality. What we
find is that family-size adjustment does not change any of the results.
Using this measure, the incomes of the bottom 40% have been flat or
falling over the last 20 years, while incomes for the upper 1% grew
78.9% on a pre-tax and 89.4% on an after-tax basis.
- Income inequality, when measured with
family-size-adjusted data, increased sharply in the 1980s and continued
to grow (albeit at a slower rate) in the 1990s. The ratio of the
size-adjusted incomes of the upper 5% to those in the bottom fifth grew
about 70%, both before and after taxes, over the last two
- Whether or not we adjust by family size, examine
pre-tax or post-tax income, or add in the value of various other income
sources-including capital gains and food stamps-there is nothing in
either the CBO or Census Bureau data that would alter any of the
findings in the Pulling Apart report or The State of Working
America 2000-01. The CBO data, in fact, shows a larger growth of
inequality and a broader and more severe decline in income at the bottom
than that shown by our analysis of CPS data in these other
- Does income mobility counteract the inequality problem?
Other critics accept the fact that inequality
has grown over time but argue that reports like Pulling Apart,
which take snapshots of the income distribution at different points in
time, miss the extent to which families move up and down that
distribution over the course of their lives. Essentially, this critique
agrees that the distance from the basement to the penthouse has indeed
grown further over time. But these critics argue that a family that
starts out in the basement has a better chance these days of making it
to the top floor than they used to. In other words, they implicitly
argue that an increase in income mobility has served to offset
the increase in income inequality.
- In fact, the "mobilitists" fail to either
articulate or substantiate this part of their argument. Instead, they
simply show evidence of economic mobility, and leave it at that, as if
mobility in and of itself should lessen our concern over increased
inequality. But unless the rate of mobility is increasing relative to
that of earlier decades, families are no more likely today to span the
now wider income gap. Unfortunately, we show below, there has been
no such increase in mobility.
- The economist Joseph Schumpeter came up with a
useful analogy to explain the concept of income mobility. He suggested
that the income scale could be thought of as a hotel where the quality
of rooms improves as you move up to higher floors. If everyone simply
ended up in the same room they started out in, society would be totally
immobile, with the poor stuck in the basement and the rich ensconced in
the penthouse. The reality, of course, is that some stay where they
start while others move up and down.
- How does this analogy help us to understand the
interplay between increased cross-sectional inequality and income
mobility? The fact that, as we show in our report, the income gap
between those at the top, middle, and bottom of the income scale has
expanded over time means that the quality of life is worse now for a
resident of the basement relative to his neighbor in the penthouse than
it was two decades ago.
- The mobilitists acknowledge this, but argue that
this family won't always be in the basement. This is true, but unless
their chance of making it to the higher floors has increased over
time, the increase in cross-sectional inequality means that they are
certain to experience more inequality over the course of their lives.
The wider income gap means that the higher floors are "further away,"
and the chance of reaching them has not increased.
- Cox and Alm are the most vocal advocates of the
mobility argument. In a series of articles, they claim that Americans'
"remarkable ability to propel themselves upward" obviate concerns about
the "red herring" of increased inequality (Cox and Alm 2000). But as we
show below, they fail to address the crucial question of whether the
rate of mobility is increasing, and thus their findings cannot be taken
to imply that mobility can offset increasing inequality.
- As mobility expert Peter Gottschalk (1996) has
noted, Cox and Alm "ask the wrong question and give a misleading answer
to the question they ask." Instead of examining whether the rate of
mobility has increased, Cox and Alm use longitudinal data to follow a
group of families over one 17-year period, and show that many of their
members do indeed move up the income scale. This is not a surprising
finding. In fact, given the way they set up the study, it was the
inevitable result of the fact that one would expect most families to see
their incomes increase as they age.
- A significant flaw in their study is the use of
individual, as opposed to family income. Thus, a teenager from a rich
family, but with a minimum wage job, will be classified in their study
as starting out in the bottom quintile. As a result, the average income
(in 1997 dollars) of those in the bottom quintile in their study was
$1,263; clearly, such a person is very unlikely to stay in the lowest
fifth. All other income studies of which we are aware use family or
household income.  The next mistake in the study was to follow a sample that is
getting older and compare the income changes of this sample to that of
the entire population, an analytical setup that virtually ensures the
finding of substantial mobility. 
The only way these authors could have gotten a
different result would be if most individuals in their sample actually
lost ground as they got older, a very unlikely scenario. Due to this
problem, we learn little about even the extent of mobility from
- But it should again be stressed that the extent of
mobility is not the key issue when trying to understand the impact of
mobility on inequality. Even if their research had approached the
question correctly, the fact of mobility should not assuage concerns
over increased inequality, unless it can be shown that workers do indeed
have more economic mobility than before.
- The better way to measure mobility is to control
for age, by comparing the income of the sample only to itself as it
ages, not to the larger population. Table 5, based on the same
data set used by Cox and Alm, applies this method.  When done this way, mobility occurs because one family's
income grows faster than that of another in the same age cohort. This is
by no means inevitable and is therefore more interesting than the rather
obvious Cox and Alm finding that families do better as they age.
- In fact, the bottom of Table 5 shows that the rate
of mobility over the 1980s, when inequality was increasing most quickly,
was no faster than in the 1970s. In both decades, about 61% of those who
started in the bottom fifth were still there 10 years later. Another 24%
made it to the second fifth. Thus, in each decade, about 85% of those
who began the period in the basement either stayed there or moved up one
floor. Of those who started out at the other end of the income scale,
about 80% in both periods (slightly more in the latter period) either
remained in the top fifth or moved down to the next highest fifth. The
table provides no evidence of an increase in the rate of
- Are low-income families better off than before?
Some critics argue that a family's well-being
should not be judged by their income, but by what they are able to buy.
These critics argue that if we look at what today's poor are able to
consume, they are much better off than even the middle class of previous
- There are two fundamental flaws to this argument.
First, these critics focus on what the poor are able to afford, not on
what goods and services the poor can't afford but the more affluent can.
Just as incomes have grown more unequal, inequality has also grown in
regards to consumption. This is what we term "relative hardship," or the
gap between the standard of living of the poor and non-poor.
- Second, these kinds of arguments tend to center on
the fact that today's poor have access to more non-essential consumer
goods, like TVs and VCRs, than the poor of previous generations. At the
same time, these critics ignore the cost of basic necessities, such as
housing and health care, that are less affordable today than in the
past. Thus, the argument ignores what we call "absolute hardship," or
the difficulties low-income families have in meeting their basic needs,
regardless of the standard of living enjoyed by the non-poor.
- Relative hardship
The fact that the poor can now afford some
things formerly beyond their means does not negate that there is a large
consumption gap. In terms of inequality, what matters is the
relative distance between income classes.
- The disparities between how much of their income
the poor and non-poor spend on basic necessities today is evidence of
this inequality. In 1992, households living below the poverty line spent
71% of their expenditures on food, clothing, and shelter, while non-poor
households spent 46% on these items (Federman et al. 1996). Thus, the
poor have a smaller share of their income to spend on other necessities
like child care, transportation, and health care. They also have less to
spend on things that will help them get ahead, like education, and are
less likely to be able to save for future needs or make investments that
would raise their future earnings capacity.
- Furthermore, when comparing poverty rates over
time, the definition of "poor" must relate to the overall growth of
living standards. If not, virtually all people in the U.S. today would
be considered non-poor because they have indoor plumbing, electricity,
and modes of transportation not available 100 years ago. Because the
current official poverty line has not been updated to reflect
improvements in our standard of living that have occurred since it was
developed, it is still set relative to income in the mid 1950s. Yet
output per hour has more than doubled since that time. Comparing
consumption patterns over a 40-year (or even longer) period using a
fixed yardstick of this sort is obviously inappropriate.
- Absolute hardship
Some critics argue that the poor's access to
consumer goods is evidence that families classified as poor based on
income are not facing real hardship. They point to data showing that
high percentages of families living below the poverty line now own
consumer durables that previously only the middle class could afford.
Rector (1998), for example, notes that the number of poor who have
access to TVs, VCRs, washers, dryers, and automobiles has increased
substantially since 1984.
- The poor are able to afford goods like TVs and
VCRs because these goods are now less expensive relative to other goods,
like housing. As an economy grows, the prices of some goods fall
relative to others-items that were once affordable only to the elite
become commonplace. The fact that everyone, including the poor, can buy
more of selected goods and services is not a very telling observation.
In fact, it is one that could be made at any time in our economic
history, since as the economy grows, certain goods and services become
affordable to all. In an important way, low-income families' access to
TVs is just a reflection of the relatively faster growth of productivity
in manufacturing that leads the prices of goods to fall relative to
services over time, a phenomenon known in economics as the "Baumol
- Ironically, critics who dismiss income inequality
by pointing to upward income mobility ignore downward mobility. The
existence of downward mobility is another reason to question whether the
durable goods ownership (TVs, VCRs, etc.) of low-income families is an
appropriate indicator of their living standards. Some families observed
in the bottom fifth were, in fact, previously middle-class families who
have suffered a change in family circumstances (death of an adult,
divorce, or separation), a layoff, or a health emergency that has
temporarily (at least for a few years) lowered their
income.  Yet these families
still retain the house (and other durable goods) obtained while enjoying
a middle-class income. In this light, durable goods ownership at the
bottom is partially a reflection of the temporary drops in income that
our social safety nets (unemployment insurance, disability insurance)
are meant to offset. It seems strange to argue that safety net programs
are not necessary anymore because low-income families may have TVs and
- The critics also argue that the poor are now
better off because the share spent on basic necessities-which they
define as food, clothing, and housing-has fallen since the 1930s. As
Figure 1 shows, the relative shares of income spent on these
three items combined has decreased since 1935. But who honestly doubted
that the poor today are better off than they were 65 years ago in the
middle of the Great Depression? The relevant time period for comparison
is the last 20 years.
- Figure 1 shows that the share of household
consumption spent on "necessities" has remained relatively constant over
the past 20 years. Looking at the period from 1972-73 to 1996-97 shows
that the consumption shares did fall for apparel (from 8% to 5%) and
food (from 21% to 16%). On the other hand, the consumption shares rose
for housing (from 31% to 37%). Health care and transportation
expenditures have remained comparable over this time period. If one
considers these five items-food, apparel, housing, health care, and
transportation-as comprising "necessities," then the share of
consumption represented by necessities has not changed much over the
last 25 years, remaining at about 85% overall. The share spent on child
care for families with working mothers also remained constant at around
7% of income between 1985 and 1991 (Casper et. al. 1994).  Thus, it is only by
selectively looking at food and apparel costs and ignoring other costs
that critics can claim that necessities comprise a smaller share of
- Focusing on durable goods ownership and the share
of income spent on necessities does not answer the central question of
whether the poor are able to meet their basic needs. In one of the
richest countries in the world, there is evidence in this time of
economic prosperity that the poor still face hardships. So-called
"hardship measures" from the Census Bureau show that in 1995, 38% of
households in the bottom income fifth had trouble paying for at least
one basic necessity (food, housing, healthcare). Below we further
discuss difficulties low-income families face in meeting their basic
- Absolute and relative difficulties in meeting basic needs
Food: While the share of a family's
income devoted to food has declined, food insecurity persists. Even in
the context of the booming late 1990s economy, 46% of the non-elderly in
families below 200% of the poverty level experienced either food
shortages or worries about food shortages (Staveteig and Wigton 2000).
This suggests that, while the cost of food relative to other goods has
declined, families still often have to decide between paying other
bills, such as rent or utilities, and purchasing food.
- Housing: Critics like Robert Rector point
out that, in 1992, 41% of households below the poverty line owned their
homes (1998). But this share is just about half of the 78% of non-poor
households that own their homes. It also masks differences in
home-ownership rates between different types of poor families; the poor
elderly are much more likely to own their homes (63% in 1992) than are
poor single-parent families (24%) (Federman et al. 1996). Focusing on
home ownership also ignores the crisis in affordable rental housing. In
1997, there were only 36 affordable  and available rental units
for every 100 households making 30% of the median income (HUD
- Both owners and renters face increased housing
costs. In 1995, 28% of households with children paid more than 30% of
their income for housing, up from 15% in 1978 (Federal Interagency Forum
on Child and Family Statistics 1999). Many poor families are unable to
meet their housing costs; in 1995, 14% of households in the lowest
income quintile were unable to pay their rent or mortgage, and 20% were
unable to afford their utilities bill (Bauman 1999). Given the steep
rise in housing costs since the mid 1990s, it is likely that these
conditions have worsened.
- Health care: Critics who argue that the
prices of basic necessities have decreased relative to luxury goods
downplay the rising cost of health care. Although recognizing that
health care costs have increased dramatically, they dismiss this as the
consequence of improved health care technology. However, improvements in
health care only benefit those who are able to afford them. The
percentage of non-elderly uninsured Americans increased from 14.8% in
1987 to 17.7% in 1996 (Kaiser Commission on Medicaid and the Uninsured
1998). Much of the increase in the uninsured stems from a decline in the
number of employers offering health insurance benefits. While there has
been a downward trend in employer-provided health insurance coverage for
all workers, this trend has been greatest among the bottom fifth of wage
earners. By 1996, less than a third of these workers (32%) received
employer-provided health insurance, a decline of 8.8 percentage points
since 1979 (Mishel et al. 1999). In contrast, 82.4% of those in the top
fifth received health coverage through work in 1996.
- As a consequence of inadequate insurance coverage,
many families in the lowest income quintile report going without medical
care because they can't afford it. In 1995, 11% of these households
reported that in the past 12 months, one of the household members needed
to see a doctor but couldn't afford to go. For those without health
insurance, 15% needed to see a doctor but didn't go, regardless of their
income level. In fact, people without health insurance in at least one
out of the past four months were twice as likely to live in households
that had trouble meeting other basic needs as were families with
continuous health care coverage (Bauman 1999). Such a finding clearly
demonstrates the burden health care costs place on the uninsured.
- Child care: The cost of child care is
completely ignored by many of those who claim that the poor are better
off. The family budget literature shows that child care costs can
comprise up to 30% of a working family's budget, meaning that, for
working families, child care can take as large a share of the family's
budget as housing (Bernstein et al. forthcoming). In 1991, families
below the poverty level spent 27% of their income on child care, almost
four times the share spent by higher income families (Casper et al.
- In 1997, the cost of quality, center-based child
care ranged from an average of $8,268 annually in a city like Chicago to
$3,640 annually in rural Arkansas (Children's Defense Fund 1998). While
more child care subsidies and tax credits are becoming available, many
working families are not helped by these programs. 
- Transportation: High car-ownership rates by the poor reflect an increased
reliance on automobiles to get to work. The spatial mismatch between
poor urban workers and suburban jobs that are not accessible by public
transportation has been well documented (Lacombe 1998). As for rural
areas, only 40% have a public transportation system (Dewees
- Higher education: While not necessary for
basic survival, access to higher education is important for an equitable
and economically mobile society. The rising cost of higher education is
also ignored by those who argue that today's poor are better off than
the middle class of the past. College costs doubled between 1980 and
1998, while the median income of families with college-aged children
only increased 22% over this period. And since those at the bottom of
the income scale have lost ground in real terms, the share of income
required to pay college costs has increased faster among these
lower-income families. Financial aid has not kept pace with increased
tuition levels during this time period, and between 1989 and 1999, there
has been an increased reliance on loans versus need-based grants as a
means of financing college (College Board 1999).
- In the end, it is obvious that, in some respects,
today's poor are better off materially than the poor of many years ago.
But in relative terms, the consumption gap mirrors the income and wealth
gaps. And even in absolute terms, many poor families continue to face
difficulties meeting their basic needs.
- Is rising inequality a serious concern or merely a necessary
tradeoff for a growing economy?
Unlike the critiques discussed thus far, the
final critique we examine takes the increase in inequality as a given,
arguing that it is simply the inevitable outcome of economic progress,
the natural result of a free market economy. According to this view, the
faster growth of inequality over the past few decades is due to the fact
that markets became less regulated, more global, and more
technologically advanced over this period. In this regard, critics have
argued that concerns about inequality's growth are "a distraction," a
"red-herring," or a "sideshow." 
- Far from a distraction, we believe that this
problem has already hurt our society in numerous ways, and has the
potential to do considerably more harm.
- First of all, the argument that free markets
generate ever-increasing inequality growth is belied by both historical
evidence and by comparing the U.S. economy with that of other
industrialized countries. In the 1950s through the early 1970s, the U.S.
macro-economy was even more impressive than today's, with lower
unemployment and faster productivity growth. True, the structure of
employment was very different then, with a much larger share of the
blue-collar workforce in the expanding manufacturing sector, and fewer
workers in the lower-paying services. Cash-transfer programs also became
more generous over this era. Due to these and other trends (e.g., a
higher real minimum wage and a more unionized workforce), this was a
period of highly equalizing income growth: the average income of
the bottom fifth more than doubled in real terms between 1947 and 1973,
while that of the top fifth grew by 85%. Since the late 1970s-as we
stressed in the earlier inequality report, Pulling Apart-income
growth has been highly unequal, with the bottom fifth actually losing
ground in real terms, the middle remaining relatively flat, and the top
- History clearly demonstrates that a fast-growing
economy does not have to result in increased wage inequality.
Furthermore, the current economy also challenges the connection between
growth and inequality. Over the last few years of the 1990s, when
unemployment finally began to fall to the range typical of the late
1960s, the growth of inequality attenuated significantly. If anything,
the end of the last decade revealed that faster growth is associated
with less, not more, inequality growth.
- We can also turn to other countries, such as those
in Europe, to investigate whether growth and inequality should be
expected to accompany one another in advanced market economies. In fact,
this comparison has some advantages over the historical one just made
because these economies face essentially the same global and
technological environments as the U.S. does. As recent research on a
number of OECD countries by Schmitt and Mishel (2000) shows, although
the growth rates of GDP per capita and productivity were faster in OECD
countries in the 1980s and 1990s, the levels and growth rates of
earnings inequality in these countries were almost all lower than those
of the U.S.
- Moreover, several European nations (Germany,
France, Belgium, and the Netherlands) have now achieved, or surpassed,
U.S. levels of productivity. 
According to the survey by Gottschalk and Smeeding
(1997), these countries all have substantially lower levels of income
inequality and have experienced less growth in inequality than the U.S.
Clearly, the OECD countries have been able to achieve GDP growth and
efficiency gains comparable to the U.S. but without the high costs of
- Nor can the growth of inequality be fully
attributed to the growth in the returns to education. Over the 1980s,
the pay premium for college-educated workers relative to those with less
education grew steeply, and this certainly contributed to the growth in
inequality. This trend led many commentators to fully attribute the
growth of inequality to what appeared to be increased demand for college
graduates relative to those with less education.  But as various inequality
researchers have pointed out, the growth of "education differentials"
explains about half of the increase in wage or income inequality since
the late 1970s.  The rest of the growth has taken place within groups of
workers with similar levels of education, and thus cannot be attributed
- This pattern is most apparent in the 1990s, when
the education pay premium has hardly grown, yet wage and income
inequality continued to grow in the 1990s (even if at a slower rate). If
educational pay differences fully explained growing inequality, the
growth should have ceased in the 1990s. Instead, other factors not
related to education continued to drive inequality's climb. 
- A related argument attributes the rise of
inequality to technology, with claims that inequality is an inevitable
outcome of the shift to the new computer-driven economy. But as numerous
analysts have shown, technological change did not arrive in the economy
with the personal computer.  This
research shows that technology has been an ongoing phenomenon; we have
seen many “new economies” over the course of our economic history. Most
importantly, technology’s impact on the wage structure, and thus on
inequality, was no greater in the 1980s or 1990s than in earlier
Pulling Apart, we go through the factors we think are most
responsible for the growth in inequality. We will not review them here
other than to say that they mostly relate to structural changes in the
U.S. economy, such as the shift from manufacturing employment to
lower-wage service jobs, increased trade imbalances, the decline in
union power, the long-term fall in the minimum wage, and monetary policy
that has unnecessarily kept the economy from reaping the benefits of
full employment. We also provide a thorough analysis of these points in
The State of Working America 2000-01 (Mishel et al.
problem of high unemployment has been ameliorated over the past few
years, over the long term these factors threaten to undermine many
working Americans’ faith in the economy. In a recent Business
Week/Harris Poll, 75% of respondents “felt that the benefits of the ‘new
economy’ are unevenly distributed” (Business Week 1999). This
sentiment may very well have arisen from the fact that productivity—the
best single indicator of the impact of new technologies on overall
growth—grew by 18% in the 1990s while the real median family
grew only 4%. The typical American family is working harder
than ever and spending more hours in the labor market. Only over the
past few years has it begun to see some returns from its effort and
sacrifices. But even so, most families’ fortunes are clearly lagging
well behind those of the better
The repercussions of
increasing income inequality are manifold. Some polls and studies reveal
the public’s great concern that the wealthy are disproportionately
determining the outcome of the political process, associating increased
inequality with political disengagement (Lewis 2000). And new “growth
theory” literature in economics is starting to build an empirical case
that the economies in countries with higher levels of inequality grow
more slowly than those of economies with more equal distributions
(Aghinon et al. 1999). Finally, new medical research suggests a
connection between increasing inequality and worse health outcomes
(Boston Review 2000).
There are many reasons to be
concerned about the phenomenon of growing inequality, and it is
irresponsible to try to explain it away with misleading arguments that
ignore the undeniable trend toward larger gaps between those at
top, the middle, and the bottom of the income or wealth scales. It is also
wrongheaded to argue that increased consumption or the mobility of
low-income families counteracts the growth of income inequality. Perhaps
worst of all would be to dismiss inequality’s growth as an inevitability
or distraction. If we want working Americans to have a stake in the
economy, they must receive their fair share of its
The authors would
like to thank Elizabeth McNichol, Gary Burtless, Frank Levy, and John
Schmitt for helpful comments. We are also grateful to The John D. and
Catherine T. MacArthur Foundation; The Joyce Foundation; The
Foundation; and the Charles Stewart Mott Foundation for
their support of this work.
1. For examples of this
literature, see Danziger and Gottschalk (1995), Karoly and Burtless
(1995), Ryscavage (1995); for an international perspective, see Gottschalk
and Smeeding (1997).
2. See analysis in Chapter 7 in The State of Working
America 2000–01 (Mishel et al. forthcoming).
3. The Census Bureau has an additional measure that
converts home equity into an income-equivalent annuity. We do not analyze
this measure because it shifts from an income to a consumption measure. We
also examined a measure comparable to “comprehensive income,” except that
government medical programs are excluded. Data with this definition go
back only to 1991. Our analysis shows that government medical programs
disproportionately help the bottom fifth but do not alter the trend in
inequality relative to the comprehensive measure that includes medical
4. The CBO is able to analyze trends in the upper 1%
in a way that cannot be done with the Census Bureau data because the CBO
corrects for top-coding problems.
5. This adjustment is made by dividing a family’s
income by their poverty threshold. Since the poverty lines are adjusted
for family size, this serves to adjust incomes for this same
6. In Census Bureau terminology, families are units
of two or more persons related by blood, marriage, or adoption, while
households include one-person units. Our Pulling Apart study uses family
7. This framework leads to the curious result of
having more than 20% of their sample in the top fifth by the end of the
8. These tables, provided by Gottschalk, appear on
p. 88 of Mishel et al. (forthcoming).
9. Figure 1K of Mishel et al. (forthcoming) cites
other work by Gottschalk showing that the percent of families staying on
the same fifth in adjacent years has trended up since the late 1960s,
evidence of declining rates of mobility.
10. Analysis using longitudinal data shows that only
one-third of those who were poor in an average month in 1994 were poor
throughout both that year and 1993 (Naifeh 1998).
11. Another group with low incomes and high assets
are the elderly, a group that has accumulated durable goods but now have
12. Child care is not included in Figure 1 because
only families with children in which all adults work outside the home face
13. Housing is considered “affordable” if it costs
less than 30% of a family’s income.
14. The Child and Dependent Care Tax Credit is
non-refundable, and therefore low-income families with no tax burden
cannot receive this credit. Furthermore, many eligible families are turned
away from assistance through the Child Care and Development Block Grant
15. The first two comments were in Cox and Alm
(2000), and the latter was made by John Weiker of the Hudson Institute
during a debate on this topic with Jared Bernstein.
16. As Schmitt and Mishel (2000) show, this would be
true even if we adjusted the data to account for the greater unemployment
in these other countries. 17. For evidence
of the slower growth in income inequality in these countries compared to
the U.S., see Gottschalk and Smeeding (1997, Table 4). The fact that
unemployment rates are higher in Europe than they are in the U.S. has led
some critics to suggest that there exists a tradeoff between unemployment
and inequality. There is, however, little evidence for this claim, and a
number of recent articles have challenged this connection. See Glyn and
Salverda (2000), Schmitt and Mishel (2000), and OECD
18. Recent research has challenged the notion that
the demand for college-educated workers accelerated in the 1980s over the
1970s (see Card and Lemieux (200) and Mishel et al. forthcoming, chapter
2)). This work attributes the faster growth in the college premium to
either a deceleration in the supply of college-educated workers or to the
negative impact of structural changes (discussed below in the text) of the
wages of non-college graduates.
19. See Burtless (1995) and Mishel et al.
(forthcoming, Table 3.24).
20. Of course, education differentials grow for
reasons other than changes in skill demand. For instance, institutional
changes in the labor markets, such as the decline in the real value of the
minimum wage and the rate of unionization (both of which
disproportionately affect the wages of non-college-educated workers) also
led to higher education premiums over the 1980s.
21. See discussion of this point in Bernstein and
22. While inequality continued to grow in the 1990s,
which was a period of accelerated computer investment, education
differentials grew much more slowly than they did in the 1980s. This
pattern contradicts the technology argument, which closely associates
increased computer usage with the increase in the college
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