Surprise, Inequality Has Narrowed Since 2007

Story Stream
recent articles

Alert voters realize the economy is neither as strong as claimed by the party in power nor the disaster described by the opposition. The election season will bring many passionate but dubious claims about economic trends. People running for office know that voters rank the economy near the top of their concerns. Of course, perceptions of the economy differ from one voter to the next. A few of us are soaring, more are treading water, and too many are struggling just to keep afloat. Both parties have seized on the idea that the rich are flying high and have recovered nicely from the Great Recession while average Americans have been left behind. The statistics tell another story.

While the unemployment rate has fallen in half compared with the worst months of the recession, the percentage of working-age Americans who are employed is still below its pre-recession level. .June's job numbers showed that slightly less than 80 percent of adults between 25 and 54 held jobs. That's almost 2 percentage points below the rate at the start of the Great Recession.
One of the most disappointing numbers from the recovery has been the growth of wages. In the first 5 years of the recovery, hourly wages edged up just 2 percent a year. After factoring in the effect of consumer inflation, this translates into a gain of exactly 0 percent. But the pace has recently improved, with workers seeing their real hourly pay climb 1.7 percent a year in the two years ending in June.

The economic bottom line for most of us is our family income. No matter how household income is measured, income gains have been slower since 2007 than they were in earlier decades. The main reason is that incomes produced in the market-in the form of wages, self-employment income, interest, dividends, rental income, and realized capital gains-fell sharply in the Great Recession and have recovered very slowly since. That a steep recession would cause a big drop in income is hardly a surprise. The bigger surprise has been the slow recovery of market income after the recession ended 7 years ago.

What's behind slow growth in average income? A popular theory is that the top 1% of income recipients have gobbled up all the income gains leaving little for families in the middle and at the bottom. Economist Emmanuel Saez tabulates U.S. income tax statistics to track market income gains at the top of the distribution. His latest estimates show that between 2009 and 2015, the top 1 percent enjoyed real income gains of 24 percent. This compares to a gain of just 4 percent for Americans in the bottom nine-tenths of the distribution.

But the rich also took huge losses in the Great Recession. Saez's estimates show that between 2007 and 2009 the top 1 percent lost 36 percent of their pre-recession income, compared to a loss of just 12 percent for Americans in the bottom nine-tenths of the distribution. Top income recipients have yet to recover from that hit. In 2015, their average market income was still more than 13 percent below its pre-recession level. Those in the bottom nine-tenths were hurt, too, but their market income was "only" 8 percent below its level in 2007.

Only about half of households rely solely on market income to support themselves. The other half receives income from the government, and that fraction goes up in bad times. Many retirees rely mainly on Social Security to pay their bills; they depend on Medicare or Medicaid to pay for health care. Low-income Americans often receive public assistance, food stamps, or government-provided health insurance. And when a downturn hits, many more families collect an unemployment insurance check.

Government benefits, which are not counted in Saez's calculations, replace part of the market income losses families experience in a weak economy. As a result, the net income losses of most families are much smaller than their market income losses. The Congressional Budget Office (CBO) recently published statistics that shed light on the distribution of income losses in the Great Recession and ensuing recovery. These show that, except for households at the top, net income losses were far smaller than the losses in market income.

For example, among households in the middle fifth of the before-tax income distribution, average market income fell more than 10 percent in the Great Recession. But if we include transfers, average income only fell 4.5 percent, and if we account for the federal taxes families pay, average net income fell just 1 percent. In contrast, among households in the top 1 percent of the distribution, average market income fell 36 percent, average income including government transfers fell 36 percent, and average income net of federal taxes fell 37 percent. Government transfers provided little if any protection to top-income households.

The CBO's income statistics end in 2013, so they do not tell us how net income gains have been distributed in the last couple of years. Based on Saez's income tax tabulations, it seems very unlikely top income recipients have recovered the net income losses they experienced in the Great Recession. All the available statistics show household income gains since 2007 have been negligible or small, and this is true across the income distribution.

It is popular to argue that slow income gains in the bottom and middle are due to outsize income gains at the very top. While this story is at least partly true for the three decades ending in 2007, it is not true since. Interestingly, CBO's latest net income tabulations show that inequality was almost 5 percent lower in 2013 than it was in 2007. The Great Recession hurt the incomes of Americans up and down the income distribution, but the biggest proportional income losses were at the very top. To be sure, income gains in the recovery after 2009 have been concentrated among top income recipients. Even so, their income losses over the recession and recovery have been proportionately bigger than the losses suffered by middle- and low-income families.

Gary Burtless is a Senior Fellow in Economic Studies and the John C. and Nancy D. Whitehead Chair at the Brookings Institution. 

Show commentsHide Comments

Related Articles