The Center's work on 'Income Inequality' Issues

New Report Highlights Need for States to Help Address Income Inequality

March 6, 2014 at 2:05 pm

An important new report documents rising inequality in states across the country.  As we outlined in our 2012 analysis of state-by-state income inequality, states can — and should — take certain steps to help alleviate these trends.

A study of IRS data by the Economic Analysis and Research Network found that:

  • The top 1 percent of taxpayers received the lion’s share of income growth across the country between 1979 and 2007, and its share of income grew in every state.
  • In 15 states, between half and 84 percent of all income growth over this period went to the top 1 percent.  In four states — Alaska, Michigan, Nevada, and Wyoming — incomes grew for only the top 1 percent while the incomes of the bottom 99 percent fell.
  • This lopsided income growth has continued after the recession.  The top 1 percent received at least half of the income growth in 33 states between 2009 and 2011 (the most recent year for which state data are available).

Governments at all levels can take steps to help alleviate these trends.  Specifically, states can:

Stop exacerbating inequality through the tax code.  In most states, low- and middle-income people pay a higher portion of their income in taxes than the wealthy.   States certainly should avoid worsening this trend with tax cuts that benefit the richest households and do little for poor and middle-income families.  For example, cutting progressive taxes like the income tax will benefit high-income families more than low-income families and will widen income gaps further.

Strengthen supports for low-income families.  States play a major role in delivering social safety net assistance.  State assistance with child care, job training, transportation, and health insurance helps poor families get and retain jobs and move up the income scale.  In addition, states can shield the nation’s most vulnerable citizens from poverty’s long-term effects by maintaining their pieces of the safety net.

Raise, and index, the minimum wage.  The purchasing power of the federal minimum wage is 22 percent lower than its late 1960s peak.  Its value falls well short of the amount needed to meet a family’s needs, especially in states with a high cost of living.  Federal action to raise the minimum wage is critical, but states don’t have to wait.  Any state can help raise wages for workers at the bottom by enacting a state minimum wage that is higher than the federal wage and indexing it to ensure continued growth.

Greenstein: We Need a Stronger EITC and Minimum Wage

March 5, 2014 at 12:19 pm

On last night’s PBS “NewsHour,” CBPP President Robert Greenstein discussed the President’s new budget and issues that both sides of the aisle might agree on.  In this exchange with host Judy Woodruff and James Capretta from the Ethics and Public Policy Center, Greenstein explained why we should strengthen both the Earned Income Tax Credit (which the President proposes expanding for childless workers) and the minimum wage:

JUDY WOODRUFF: [W]hat do you see in here, Jim Capretta, where you see the two parties could work together?

JAMES CAPRETTA: Well, there’s one possibility. I don’t know how much of a chance, but around the Earned Income Tax Credit, there’s more bipartisan support for that kind of an approach to wage supplements than it is for just redistributing through taxing and spending.

[The] Earned Income Tax Credit is a program that Bob knows well that provides additional support directly through the federal tax system to people that are actually working, have a job, and it boosts their income directly to the proportion of earned wages. It’s the kind of thing that could be built on.

It’s better than doing, frankly, a minimum wage increase, certainly of the size the president has pushed….

ROBERT GREENSTEIN: I think we need to do both the minimum wage increase and the Earned Income Credit.

You can’t do the whole thing through the Earned Income Credit. It puts too much strain on government finances. You can’t do the whole thing through the minimum wage. That puts too much strain on employers.

But I think Jim is right that there is a potential here, for even another reason. The president is proposing to increase the Earned Income Credit for workers not living with minor children. We already have a sizable Earned Income Credit for families with kids.

When you look at these young workers or middle-aged workers who are single individuals, if they’re paid low wages, they’re the one group whom the federal government today literally taxes into poverty or deeper into poverty. That should be something that both parties can say, that’s not a good idea. And both parties want to encourage these people to work more, and the Earned Income Credit does that.

We’ve documented the importance of extending the EITC to childless workers and why we need a stronger minimum wage.

Watch the interview below:

Why a Higher Minimum Wage Is a Net Win for Most Income Groups

February 20, 2014 at 4:20 pm

Here’s a point about the minimum wage that hasn’t received enough attention: A rise to $10.10, from the current $7.25, raises average incomes for roughly the bottom half of all Americans — those with incomes up to $72,300 for a family of four, according to the new Congressional Budget Office (CBO) report on such a proposal.

Yes, as widely reported, CBO estimates that a minimum wage hike to $10.10 would mean the loss of 500,000 jobs (though some top economists, such as Harvard’s Lawrence Katz, estimate smaller or negligible losses), and some business owners and shareholders would have lower profits.  But, even after factoring in those costs, the wage hike would lift 900,000 people out of poverty and most income groups would see net income gains, as the chart shows:

Annual incomes would rise by 2.8 percent — $300 — for families below the official poverty line (which is $24,100 for a family of four) and by somewhat smaller percentages for families between one and three times the poverty line ($72,300 for a family of four).  Together, these two groups comprise roughly the bottom half of the population, according to Census data.  Only families at or above six times the poverty line ($144,600 for a family of four) would be net losers.

With incomes rising at the bottom and shrinking very slightly at the top, income inequality would decline.  That’s no surprise:  two-thirds of workers who would benefit directly are in the poorest half of the population.  CBO estimates that the net impact on the federal budget over the long term would be “small” and uncertain — essentially, zero.

Given what we’re learning about poverty’s large long-term effects on health, education, and economic opportunity, we shouldn’t pass up a chance to help lower-income working families and reduce poverty at no cost to the budget.

Why We Need a Stronger Minimum Wage

January 29, 2014 at 12:18 pm

Our last post noted that support for expanding the Earned Income Tax Credit (EITC) for childless workers — as President Obama recommended last night — is growing on both sides of the aisle.  Policymakers also should help low-wage workers by strengthening the minimum wage.

Today’s minimum wage is 22 percent below its late 1960s peak, after adjusting for inflation.  Raising it to the $10-an-hour range would help to offset some of the unfavorable trends facing low-wage workers, including stagnant or falling real wages, too little upward mobility, and inadequate bargaining power that leaves them solidly on the “have-not” side of the inequality divide.

The President last night announced an executive order to raise the minimum wage for workers on government contracts to $10.10, thereafter indexed to inflation.  That’s a good first step, as I explain here.

The increase is modeled on a proposal before Congress — the Fair Minimum Wage Act of 2013 (FMWA) — to raise the minimum wage from $7.25 to $10.10 in three annual increments and then index it to inflation.  If policymakers enact the FMWA soon, by 2016 the value of the minimum wage (adjusted for inflation) would be slightly above its late 1960s peak, as the graph shows.

The question of whether raising the minimum wage reduces employment for low-wage workers is one of the most extensively studied issues in empirical economics.  The weight of the evidence is that (1) for minimum wage levels in the range now being discussed, such impacts are small, and (2) minimum-wage increases of the size enacted in the past, and under the proposals now being discussed, are a net benefit to low-wage workers as a group.  Raising the minimum wage also would modestly lower poverty and help push back against rising inequality.

Some opponents of raising the minimum wage argue that it would primarily benefit teenagers working for extra money, but the large majority of those who would benefit are adults, most of them women.  Indeed, the average worker who would benefit brings home half of the family earnings.  This reflects the fact that the low-wage workforce has gotten older (and more educated) in recent decades.

In addition, though opponents often suggest that the EITC obviates the need for a minimum-wage increase, both a strong EITC and an adequate minimum wage are needed to ensure that work “pays” for those in low-wage jobs.  The two policies are complements, not alternatives.

To lift working families’ incomes to an adequate level through the minimum wage alone, policymakers would have to raise it far above its historical level — and to a level that could raise significant concern about the effect on jobs.

Similarly, if policymakers tried to do the job solely through refundable tax credits like the EITC, the cost to the government would be well beyond what they likely would countenance.  Also, low-income workers would get too large a share of their income once a year at tax time, rather than throughout the year in their paychecks.

Working together, however, a decent minimum wage and strong refundable credits can help low-wage workers make ends meet and ensure that those considering whether to work have a strong incentive to take a job.

Bernstein: Raising the Minimum Wage Would Boost the Economy

January 24, 2014 at 10:14 am

Raising the minimum wage would help the economy, CBPP Senior Fellow Jared Bernstein writes in the latest edition of the CQ Researcher.

Two well-established facts help back up this argument, Bernstein says:

The first fact is that the American economy is made up of 70 percent consumer spending.

Economists widely agree that an extra dollar earned by a wealthy person is less likely to be spent than an extra dollar earned by a low-income person….

The second fact is that moderate increases in the minimum wage boost the earnings of most low-wage workers without leading to large employment losses. The increase favored by the president and congressional Democrats, which would take the federal minimum wage from $7.25 up to $10.10 in three annual increments, would place the real value of the wage floor back where it was in the late 1960s and would directly affect about 13 percent of the workforce….

In an economy driven in no small measure by consumer spending, moderately boosting the pay of low-wage workers with relatively high propensities to spend their new earnings should produce slightly faster macroeconomic growth.

Raising the minimum wage “is unlikely to be a big deal in terms of the larger growth picture,” Bernstein says, but “it really makes a difference in helping working families toiling at the low end of the service economy get a bit closer to making ends meet.”