Lower pay for poor widening U.S. income gap: Study

Bottom 20 per cent earned US$10,454 in 2014
By Josh Boak
|payroll-reporter.com|Last Updated: 01/14/2016

WASHINGTON (AP) — The income gap afflicting major U.S. cities goes beyond the problem of rising paychecks for those at the top: Pay has plummeted for those at the bottom.

Many of the poorest households still earn just a fraction of what they made before the Great Recession began in late 2007. Even as the recovery gained momentum in 2014 with otherwise robust job growth, incomes for the bottom 20 per cent slid in New York City, New Orleans, Cincinnati, Washington and St. Louis, according to an analysis of Census data released Thursday by the Brookings Institution, a Washington think-tank .

"It's really about the poor losing ground rather than these upper-class households pulling away,'' said Alan Berube, a senior fellow at Brookings and deputy director of its metropolitan policy program.

Consider Cincinnati, home to such major companies as Procter & Gamble and Macy's that are associated with middle class prosperity. Its bottom 20 per cent earned just $10,454 (all dollars US) in 2014. After inflation, that's 3 per cent less than what they earned in 2013 — and 25 per cent below their incomes when the recession started eight years ago.

Cincinnati's top 5 per cent of earners made at least $164,410 in 2014, a figure that has increased since 2013, though it remains 7 per cent below pre-recession levels.

The consequence is a widening income gap. The top 5 per cent earned 15.7 times what the bottom 20 per cent did in Cincinnati. Nationally, this ratio was 9.3 — the same as in 2013. Before the recession, the ratio was 8.5.

The poorest have clawed back some of their earning power since the economy officially began to recover 6 1/2 years ago. But the analysis suggests that strong job growth and modest pay raises have failed to pull millions of Americans back up the economic ladder.

The findings also complicate plans by presidential candidates to combat inequality because it's unclear how tweaking tax rates on the wealthy — the Democrats largely favour increases, the Republicans cuts — will boost pre-tax incomes for the poorest. Congressional Republicans have discussed increasing tax cuts for low-income workers without children as a way to address the absence of wage growth. It's a plan, President Barack Obama said in his State of the Union address Tuesday night, that ``we can all support.''

Brookings found that the income gap was highest in Boston, where the top 5 per cent made 17.8 times what the bottom 20 per cent did. But that gap appears to reflect the large population of college and graduate students in a city containing Harvard University, the Massachusetts Institute of Technology and many other leading institutions of higher education.

New Orleans, where pay for the bottom 20 per cent also declined, had the second-worst ratio at 17.7. Atlanta came in third-worst at 17.5 and Cincinnati fourth.

At the other extreme, incomes for the bottom 20 per cent of earners jumped in Provo, Utah, where the ratio is a low 7.8. They also improved sharply in Denver despite above-average levels of inequality in that area.

Persistent income disparity has become increasingly visible in the housing market. Brookings found that the bottom 20 per cent of residents in the Washington, D.C., area — who earn just $21,230 — would need to spend nearly half their income on housing.

That analysis dovetails with findings by Harvard's Joint Center for Housing Studies in December. It reported that rents on average increased 7 per cent between 2001 and 2014, after adjusting for inflation, while incomes fell 9 per cent.

As a result, a growing number of Americans must spend more than 30 per cent of their income on rent — a level that the government considers financially burdensome. Over the past decade, that number has jumped from 14.8 million to 21.3 million, or 49 per cent of all renters.

A surge in apartment construction has done little to help address this problem because in many metro areas, a large proportion of new apartments are concentrated at higher-income levels. The median rent on a newly built apartment was $1,372 a month in 2014, about $500 more a month than what about half of renters could afford without being financially burdened.

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