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The price of inequality? Lost annual income of $42,000 for typical worker, study finds

Paying the price: Income inequality and coronavirus
Paying the price: Income inequality and coronavirus 08:04

Income inequality has given the rich a greater share of the economic spoils than middle- and low-income earners. That's resulted in a very real impact on the incomes of middle- and low-income households, with the typical full-time American worker now earning $42,000 less than they would have if inequality hadn't surged over the last four decades.

That's according to a new analysis from researchers at Rand, the global policy think tank. Its researchers wanted to look at the dollars-and-cents impact on U.S. households from yawning income inequality, which has lifted the fortunes of the rich to that of Gilded Age levels

Prior to the mid-1970s, Americans' incomes, no matter their level, generally rose in step with overall economic growth. But that changed in the late 1970s, with the rich capturing the lion's share of economic growth, while middle-class and lower-income workers eked out gains far below par.

In 2018, the typical full-time worker earned about $50,000 — but if that same worker had kept up with the economy's expansion, they would have earned $92,000 annually, the Rand analysis found. 

Only the top 5% of Americans have enjoyed earnings that approached or exceeded the nation's economic growth. Meanwhile, the top 1% has come out far ahead, gaining a far greater share of economic growth than they did prior to the 1970s. 

The typical person in the top 1% earned $1.4 million in 2018, but would have earned $630,000 –– less than half that amount –– were it not for benefitting from widening inequality, the analysis found. 

"I hope that this provides a sense of the scale of the problem that rising inequality has been for the vast majority of Americans," said Carter Price, one of the Rand researchers who co-authored the analysis with Kathryn Edwards. 

The Rand report doesn't specify the causes of growing inequality, however economists such as Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley have posited that the inequality can be partly blamed on tax policies that favor the rich. Their 2019 book "The Triumph of Injustice" found that the 400 richest U.S. families now pay a lower overall tax rate than the middle class, the first time that's happened in 100 years. 

Widening income inequality has also been set against the backdrop of declining labor union membership and a wage premium for college-educated workers, with people who lack college diplomas suffering from weaker wage growth.

Between 1975 to 2018, the bottom 90% of earners lost out on $47 trillion in taxable income, the Rand analysis found.

The Gini in the bottle

To track inequality, economists rely on a measure called the Gini coefficient, a statistic developed over a century ago. It scales inequality from zero to 1, with zero representing complete equality and 1 representing total inequality (one person receives all the wealth, and everyone else gets nothing.) The U.S. had a Gini coefficient of 0.39 in 2017, worse than any other country in the G-7, according to the Organisation for Economic Co-operation and Development (OECD). For instance, Germany's Gini coefficient is 0.29 and Canada's is 0.31. 

But it can be difficult to grasp the real-world impact of an abstract number, which is what prompted Rand researchers to examine taxable incomes after decades of growing inequality. 

"This measure should be more easily interpretable than a Gini coefficient — is a Gini of 0.4 good or bad?" Price noted.

The Rand analysis helps explain the financial stress that many American families are experiencing, said David Rolf, the founder and president emeritus of labor union SEIU 775 and the founder and chairman of the Fair Work Center, which funded the Rand research. For instance, even before the coronavirus outbreak created the current recession, 4 in 10 Americans said they couldn't handle a $400 emergency expense

"As someone who spent his life representing low-wage workers, even I was shocked at the size of the problem, and just how far up the income scale the problem goes," Rolf said, noting that even families earning $90,000 or $100,000 per year can find themselves in precarious financial straits. 

He added, "They are still not nearly capturing their share of national income vis-a-vis income growth and inflation over the last four decades."

For instance, full-time workers at the 90th percentile of the income distribution earned $133,000 in 2018, or the type of six-figure income that many Americans aspire to. But they are still losing out, with Rand finding that they would have earned $168,000 if they had earned an equal share of economic growth. 

The losers: Men and rural workers

The analysis also examined income by demographic groups, such as gender, race, the urban-rural divide and education. 

White men who work full-time grabbed the smallest share of economic growth of any other demographic, the researchers found. The median income for these workers stood at $57,000 in 2018, but they would have earned $109,000 if they had kept pace. According to Rand's calculations, their incomes grew by about one-tenth of the nation's economic growth from the mid-1970s until 2018.

That share of economic growth trails the amount captured by White women, Black men and women and Asian men and women, the study noted.

Rural workers have also lost out in the last four decades. The typical full-time rural worker earned $43,000 in 2018, but should have booked $78,000 if they'd kept up with national economic growth. Their share of growth stood about six percentage points lower than urban workers. 

The findings are "absolutely shocking and, if I may say so, a little terrifying," said Nick Hanauer, founder of public-policy incubator Civic Ventures and co-founder and partner of the Seattle-based venture capital firm Second Avenue Partners. "They explain to me almost completely why our politics are so polarized."

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