Report: Rising Income Inequality Slows Pace of Recovery

Unemployment may be at the lowest level in three years, and the housing sector may be showing signs of life, but a serious structural problem in the economy seems to actually be getting worse, not better:  income inequality.

Recent data from the Census Bureau and a new report from the Working Poor Families Project show that the number of low income working families increased to 10.4 million in 2011, up from 10.2 million in 2010. That shouldn't be so surprising since, as Nobel economist Joseph Stiglitz and Demos Senior Fellow Wallace Turbeville remind us, "the top 1 percent of income earners took home 93 percent of the growth in incomes" in 2011. 

In "Low Income Working Families: The Growing Economic Gap," the Working Poor Families Project notes that the total number of working poor families is up to 47.5 million, and could reach 50 million in the next few years. There may be new jobs, but, as the report suggests, they don't pay enough for most families to meet basic expenses. Demos' recent report on underpaid retail workers made the same point. 

If these families can barely pay for basic needs, they can't contribute fully to the economy -- which means that the recovery will continue to be slow. Households in the bottom 20% took home less than 5% of all income earned in 2011. That's millions of people without much walking around money, to put the situation mildly. Meanwhile, wealthy households stash away ever greater sums in stock portfolios or other forms of savings -- money that doesn't do much good for the economy at a time when there is too much capital and too little consumer demand.

Demos' retail report found that better pay for low income workers could provide a nice boost for the economy:

A wage standard at large retailers equivalent to $25,000 per year for full-time, year-round workers would increase GDP between $11.8 and $15.2 billion over the next year. As a result of the economic growth from a wage increase, employers would create 100,000 to 132,000 additional jobs.

Of course, inequality didn't begin with our recent recession, but it's the strength and growth of this trend that's worrying. The authors of the WPFP report -- Brandon Roberts, Deborah Povich and Mark Mather -- cite the decline of investment in educational programs, and the soaring costs of education and student loan debt as factors related both to inequality and the slowed potential for economic recovery. Globalization and new technology mean that America's manufacturing jobs may never come back to the levels of the 1950s. Market forces reward some kinds of skills over others, and those who have those skills do well. The problem is that it's mainly wealthy households who seem to be able to access the education to gain these skills. 

Meanwhile, we're seeing an accelerated growth of part-time work as opposed to stable, full-time jobs. The report describes how companies hire workers for slightly less than 40 hours per week to cut down the costs of providing wages and benefits, and workers must work additional jobs to even begin to support their families. Many of these jobs are in the service sector and require long hours, including evenings and weekends. 

The WPFC reports some hope for the poorest families in the recent extension of the Earned Income Tax Credit and other tax credits for low income workers, which are important to leveling the economic playing field. 

Still, pending cuts for federal programs for skills training, nutritional assistance, and medical services could mean further pain, especially when it comes to how much money the Federal government will disburse to state and city governments. This funding that is particularly crucial to educational programs, including the kind of early childhood education that often determines future success. 

Multiple articles (in addition to Stiglitz's, there was another piece by Adam Davidson in the New York Times Magazine) in the past week leading up to the inauguration have highlighted just how bad the income gap has become. Hopefully this renewed attention will lead to greater investment in education, job training, and medical services so the next report doesn't show 50 million people living below the poverty line.