A stark picture of income inequality was drawn by a new report last week arguing that in the midst of the 1990s' soaring economic boom, the poor and middle class got poorer and the very rich got a whole lot richer, particularly in the nation's capital.
Many economists and analysts agree about a growing trend of economic disparity among American families, as reported last week by the Center on Budget and Policy Priorities and the Economic Policy Institute in the District.
But there is little consensus on the severity of the shift, why it is happening and what, if anything, should be done about it.
The center's analysis, reporting a growing gap in wages for American workers at the top, middle and bottom end of the pay scale, is challenged by a report last week by Federal Reserve economists using a different approach. The Fed economists found that the biggest factor in income inequality in the 1990s was the stock market, not pay checks.
According to the center, the average annual income for the poorest one-fifth of D.C. families declined by $1,510, or 17 percent, from the late 1980s to the late 1990s, after adjusting for inflation. Families in the middle fifth--those earning from $27,600 to $49,575 in 1990--took a comparable hit. The average income for this group dropped by $5,950 over the decade, or 14 percent. Meanwhile, the average for the wealthiest fifth, those earning more than $89,605, rose by $54,970, or 37 percent.
In Maryland, the report said, the poorest fifth had only a 4 percent increase in average income, while the income of the middle fifth rose by 3 percent. Those in the top fifth had a gain of 23 percent. Virginia's disparity was less severe: a 3 percent drop in income for the lowest fifth; a 1 percent decline for the middle group; and a 13 percent increase at the top.
Focusing on wages, the center argued that the causes of the shift include government policies that encouraged immigration and imports, and governments' refusal to strengthen the role of labor unions or raise the minimum wage. "We're confident the top end is growing" disproportionately, said Liz MicNichol, an economist at the center.
But the Federal Reserve study seems to undermine the center's argument about wage inequality.
The biggest economic disparity among families was because of changes in family net worth, including real estate and stock market holdings through retirement plans or private portfolios, the Fed said.
From 1995 to 1998, the average net worth of families with incomes of at least $100,000 jumped to $1.7 million from $1.3 million, adjusted for inflation, coinciding with the stock market's surge. But the net worth of families with less than $10,000 shrank from 1991 to 1998. Net worth gains for families in between increased the more wealth they had to begin with.
There are major differences in the center's and Fed's methods that could explain part of these differences.
The center's attempt to portray changes in income inequality in the District over the 1990s is particularly risky for several reasons, said Philip M. Dearborn, president of the Greater Washington Research Center. First, the government survey on which the center's report is based includes a relatively small number of D.C. families, creating a large margin of error.
Secondly, the center's analysis covers a decade of demographic upheaval in the District, when a large part of its middle class fled to the suburbs. Given the significant migration of immigrants into the city over the decade, the families that made up the poorest one-fifth 10 years ago may be quite different from those in that group today, Dearborn said.
"I'm not confident of any of these numbers [about] the District," he said.
The strongest point of agreement in the center and Fed reports is the power of education to raise family wealth by increasing skills and employability. "Next to a lot of good luck, education is the great driver of income," a Fed economist said.
See www.centeronbudget.org and www.federalreserve.gov/pubs/ oss/oss2/ 98/scf98home.html to review the two reports.
A recent study by the Center on Budget and Policy Priorities shows the income disparity between the richest and poorest getting bigger in the Washington area. Federal Reserve findings, however, challenge the center's conclusion.
Inflation-adjusted change in incomes from the late 1980s to late 1990s
In dollars Maryland D.C. Virginia
Poorest fifth 750 (4%) -1,510* (-17%) -420 (-3%)
Middle fifth 1,540* (3%) -5,950* (-14%) -770 (-1%)
Richest fifth 30,930* (23%) 54,970* (37%) 17,950* (13%)
* Change is statistically significant at the 95 percent level of confidence.
SOURCE: Center on Budget and Policy Priorities and Economic Policy Institute