Income Gap Blows Out: Rich Get Richer

Rich or poor it’s nice to have money. The income gap in America has widened further during the past few years, as the average U.S. worker continues to struggle to gain ground after the Great Recession.

Economist Emmanuel Saez of University of California, Berkeley has updated his important analysis of income inequality and the results are sobering. From 1993 – 2012, average real incomes (adjusted for inflation) per family grew by 17.9 percent (that amounts to an annual growth rate of 0.87 percent). To get a better picture of the overall growth, the research excluded the top 1 percent of earners, (defined as income over 394,000), which reduces income gains over the 19-year period to 6.6 percent (or an annual growth rate of 0.34 percent). The top 1 percent incomes grew by 86.1 percent (annual growth rate of 3.3 percent).

Bottom line: From 1993 – 2012 the top 1 percent of earners, captured just over two-thirds of real incomes per family.

The Great Recession did wallop the folks at the top. From 2007-2009, income for the top 1 percent plummeted 36.3 percent, while the bottom 99 percent declined by 11.6 percent. But the rich came roaring back during the first three years of the recovery period: from 2009 to 2012, average household income, adjusted for inflation, increased by 6 percent, but the gains were even more lopsided than the longer term trend: the top 1 percent, grew by over 31 percent, while the bottom 99 percent saw just a 0.4 percent increase.

That means that the top 1 percent captured 95 percent of the income gains during the three-year recovery. Saez notes, “In sum, top 1 percent incomes are close to full recovery while bottom 99 percent incomes have hardly started to recover.”

The trends that fostered income inequality have been in place for some time. As early as the 1980’s, technological advances and globalization began to impact average income. At the same time, the ability of unions to protect wages for workers started to diminish and large corporations replaced standard benefits like company-funded pension plans with employee-funded 401 (k) plans. The icing on the cake was a tax policy that over the past 20 years favored the highest earners.

Saez ends the report with the following challenge: “We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.”

My two cents: an economy where only the top 1 percent makes progress is not sustainable.

For more, go to JillonMoney.com

Chart: Piketty and Saez (2003), series updated to 2012 in August 2013 using IRS preliminary tax statistics for 2012.

Photo by Flickr User B Tal

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