Where’s My Raise? The Economy Is Growing, but Most People Are Earning Less
Policy + Politics

Where’s My Raise? The Economy Is Growing, but Most People Are Earning Less


In another troubling sign of the wage stagnation bedeviling middle-class Americans, the Census Bureau last week reported that the median income for households headed by people below the age of 65 actually decreased 1.3 percent between 2013 and 2014 -- from $61,252 to $60,462.

“This decrease unfortunately exacerbates the trend of losses incurred during the Great Recession and the losses that prevailed in the prior business cycle from 2000–2007,” noted Lawrence Mishel and Alyssa Davis of the Economic Policy Institute, a pro-labor Washington think tank.

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This crisis of wage stagnation and growing income disparity between the middle class and the wealthiest Americans is playing out in every corner of the country and has become a cause célèbre for both parties in the 2016 presidential campaign.

Former Republican Florida governor Jeb Bush recently proposed major tax reforms that would cut rates across the board and close some loopholes for wealthy investors, while former GOP Sen. Rick Santorum of Pennsylvania supports a boost in the minimum wage. On the Democratic side, former secretary of state Hillary Rodham Clinton and Sen. Bernie Sanders of Vermont are promoting a raft of benefits for the middle class, including free or subsidized college tuition, an increase in the minimum wage, jobs programs and funding for child care.

Cities and states are also attempting to address the persistent economic disparity. In June, California’s state senate approved a bill to raise the minimum wage from $10 an hour to $11 an hour next year. The previous month, the city of Los Angeles voted to increase it its minimum wage from $9 an hour to $15 an hour by 2020, in a major victory for labor groups. Several other cities, including San Francisco, Seattle, Oakland and Washington, D.C. have also approved increases, and many more are considering following suit.

While state and local officials ponder other ideas for addressing the plight of the middle class, many of them are puzzling over a mystifying part of the problem: At the same time the income gap has widened between the middle class and the wealthy, economic growth in virtually every state has outpaced any gains in median household income.

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In other words, median-income families remain stuck in a rut even as the economies of their states are taking off after years of recession and retrenchment.

This disconnect between economic growth at the state level and median income was described in a recent analysis by Stateline, a publication funded by the Pew Charitable Trusts. The gaps differ from state to state, depending on local economic circumstances and investment strategies, the study found. But the bottom line is a notable contradiction between statewide economic growth and stagnant middle-class income.

“The divergence between middle-class income growth and general economic growth has been a topic of debate among economists for years,” according to Stateline. “But the new analysis—which uses state gross domestic product per person as a measure of economic growth and income data through 2013, the most recent available—reveals significant differences between states that often reflect their differing economies.”

For instance, some of the biggest gaps between economic and median income growth were found in states with booming energy industries, such as North Dakota and Wyoming. Others in that category include Alaska, Louisiana and Nebraska, according to the study. The states with the narrowest gaps include Arizona, Colorado, Delaware, Idaho and Nevada.

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The District of Columbia was the only place where the median household income outpaced growth in the economy. A 2013 report by EPI found that “knowledge-based economies” like those in the nation’s capital and in Massachusetts could prosper through a well-educated workforce.

Explanations for this phenomenon vary – but integral to all of them is the fact that the rich are getting richer while median income and lower income people are getting poorer, relatively speaking. Lane Kenworthy, a sociologist at the University of California at San Diego, says in the Pew report that as the top one percent of income earners have amassed a larger portion of the country’s total wealth, “household income growth for the middle class has become decoupled from economic growth.”

Mark W. Frank, a professor of economics at Sam Houston University in Texas who has done extensive research in this area, agrees that the stubborn disparity between middle and upper income Americans has a lot to do with the situation on the ground in many states.

“You get some of these good state growth numbers that are coming out, but a lot of the good growth that comes from the states is highly correlated with what’s going on with the top one percent of the population,” Frank said in an interview. “So when the top one percent does pretty good, it just so happens that the state is generally doing really good too.”

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“The phenomenon over the last few decades now is that if you take out that growth in the income of the top one percent, the bottom 99 percent aren’t growing nearly as much,” he added. “So when you take a statistic by median income in a state or in the United States, you can see it’s pretty flat.”

Frank said that he and other economists don’t fully understand the economic dynamic at play here, saying “I don’t think we really have a strong grasp on the underlying mechanisms that are causing that – and what can be done to help those income gains at the top filter down through to the system.”

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Kenworthy said in an interview that while there are things that can be done at the state and local level to address these inequalities – including raising the minimum wage and providing middle-income people with tax credits, early education programs, job training and paid parental leave – the heavy lifting will have to come from Washington in the form of major tax reform and a uniform boost in the minimum wage.

None of that is likely to happen until after the 2016 election, at the earliest.

The Federal Reserve can help as well, he added, by continuing to focus more on the problem of unemployment than inflation.

“I think one of the biggest things that could help is that the Federal Reserve doesn’t panic and worry about inflation too soon,” he said. The Fed decided late last week to keep short-term interest rates near zero as a hedge against a possible decline in the economy later this year – a good move as far as Kenworthy is concerned.

“If it’s willing to let unemployment go a bit lower, we might actually begin to see some real wage increase, just like we did in the late 1990s,” Kenworthy said. “That’s totally a national rather than a state government issue.”