September 30, 1999

Strong income growth, falling poverty rates in ’98, yet inequality unchanged

Income and poverty data for 1998, released today by the U.S. Census Bureau, show that American families are clearly benefiting from the tight labor market and the strong economy. Median family income grew by $1,475 in 1998, a 3.3% increase over 1997 (all values are adjusted for inflation) and the largest one-year gain since 1986. Taken in tandem with last year’s growth of 3.0%, median workers have not had two such strong consecutive years in well over two decades.

Poverty fell by one-half a percentage point and, for the first time in the recovery, is back to its 1989 level, the year of the most recent business-cycle peak.

Despite this good news, income inequality was unchanged, and remains at its highest level since the Census began tracking these data in 1947. In fact, family income inequality has not declined at all over the 1993-98 period. With the economy currently performing very well by most indicators, this is a worrisome outcome, suggesting that inequality is highly intractable and that more will have to be done to address it.

While family income growth over the past two years has been strong, income growth in the 1990s has been unimpressive in historical terms. Using annualized growth rates to compare business cycles of different lengths shows that real median family growth in the 1990s of 0.4% per year now equals the growth rate of the 1980s (also 0.4%). Median family income grew at more than twice this rate in the 1970s (1.0%), and even faster in the 1950s and 1960s (2.6% and 3.4%, respectively). It would take three more years of the current growth rate, uninterrupted by recession, for the median family to return to the 1% annual gain that prevailed over the 1970s.

Income growth for middle income families is mostly driven by their earnings. Here, too, the Census data show considerable growth, particularly for male workers. The inflation-adjusted median earnings of men working full time and year-round grew by 3.4% in 1998, the largest gain for this group since 1972. Earnings for women workers grew by 2.0%, a deceleration from their 3.0% gain last year. Thus, the gender-earnings gap grew slightly (though the Census points out that this increase was statistically insignificant).
Family income growth was fairly even among income classes, and thus the share of national income going to each quintile of the income scale was unchanged from last year. Average income growth for the least well-off families-the bottom 20%-was 2.3% in 1998, compared with 3.1% for the middle fifth and 3.3% for the top fifth. Since 1989, however, real family income has grown only 0.7% for the bottom fifth, 3.8% for the middle, and 15.6% for the top fifth. For the affluent families in the top 5% of the income scale, average income grew by 26.3% in the 1989-98 period.

Since 1996, the strong economy has clearly lifted the economic prospects of working families throughout the income scale, many of whom benefited little from the recovery before that point. The fact that the economy has been operating at or close to full employment since 1997 is the most important explanation for these positive results. Nevertheless, these salutary economic conditions have failed to lower historically unprecedented rates of income inequality. If the strongest economy in 30 years is unable to ameliorate this serious economic and social problem, there is a strong rationale for pursuing public policies that can.

-Jared Bernstein and Lawrence Mishel

The Economic Policy Institute INCOME PICTURE is published annually month upon release of the Bureau of Labor Statistics’ employment report.