Monday, February 15, 2016

States where the middle class is dying

(Alex Kent)  Despite the country’s unemployment rate falling below 5% in January for the first time since 2008, and the Federal Reserve’s decision to raise interest rates for the first time since 2006, concerns about wage growth — particularly among middle earners — remain. Since 2010, as the country began to recover from the Great Recession, income of the top 20% of households grew 3.7% from 2010 through 2014. During that time, incomes of the middle 20% of households declined 0.7%.
Based on income earned before taxes by the third quintile — the middle 20% of earners in each state — middle class incomes in Rhode Island declined the most in the country. Incomes among middle class Rhode Island households fell by 3.1% from 2010 to 2014, while income among the state’s fifth quintile, the top 20% of state households, grew by 4.5%. Based on an analysis of household incomes among America’s middle class, these are the states where the middle class is suffering the most.
Consumption is by far the largest component of GDP. Because middle income families typically spend large shares of their income on goods and services, America’s middle class is expected to drive up consumption — and by extension, GDP. While high income households are able to spend enormous sums of money, there is often only so much an individual can spend, even on luxury goods.
These are the states where the middle class is dying.
1. Rhode Island
> Middle income growth 2010-2014: -3.1%
> Fifth quintile income growth 2010-2014: 4.5% (18th highest)
> Fifth quintile share of income: 51.2% (10th highest)
> Middle class household income: $55,414 (19th highest)
Middle class households in Rhode Island are among the worst off compared to the highest earning households in the state. From 2010 through 2014, middle class household incomes shrank 3.1% to $55,414 a year. Over the same period, incomes of the top 20% of households grew by 4.5%, one of the largest income growth disparities between those cohorts in the country. Consequently, the state’s Gini coefficient increased nearly four times as fast as the nation’s comparable figure from 2012 through 2014. Additionally, the state’s labor market is far from healthy. Nearly 8% of the state’s workforce is unemployed, the third highest unemployment rate in the country. And while the state’s unemployment rate has fallen 3.5 percentage points since its peak in 2010, the decline is due largely to a 2.4% contraction in the state’s labor force.
2. Georgia
> Middle income growth 2010-2014: -2.7%
> Fifth quintile income growth 2010-2014: 2.7% (22nd lowest)
> Fifth quintile share of income: 51.3% (9th highest)
> Middle class household income: $49,285 (18th lowest)
Household incomes of the top 20% of earners in Georgia grew by 2.7% in the five years through 2014, slower than the 3.7% income growth among that cohort nationally. While the income growth in the top quintile of households was modest over that period, incomes of middle class households declined dramatically. Income from Georgian households in the third quintile fell by 2.7% over that period, more than 2.0 percentage points faster than the 0.7% decline in middle class incomes nationwide.
Union membership, which can help strengthen a state’s middle class, is low in the state with just 4.3% of workers belonging to a union, considerably less than the 11.1% of the American workforce with a union membership
> Middle income growth 2010-2014: -2.2%
> Fifth quintile income growth 2010-2014: 6.0% (11th highest)
> Fifth quintile share of income: 49.3% (20th lowest)
> Middle class household income: $49,250 (16th lowest)
Unlike most states where the middle class is falling behind, income in Maine is relatively well distributed. However, the income gap in Maine is widening faster than in the nation as a whole. Average incomes among the wealthiest 20% of households in the state grew by 6.0% between 2010 and 2014, one of the faster growth rates and much faster than the comparable national figure of 3.7%. Incomes earned by middle class households, on the other hand, declined 2.2% over that time. While more income has been shifting faster to the state’s wealthiest residents, both Maine’s unemployment and poverty rates have been lower than the respective national rates.
4. North Carolina
> Middle income growth 2010-2014: -1.8%
> Fifth quintile income growth 2010-2014: 3.3% (25th highest)
> Fifth quintile share of income: 51.0% (11th highest)
> Middle class household income: $46,677 (11th lowest)
North Carolina’s unemployment rate dropped 4.8 percentage points from 2010 to 6.1% in 2014, just below the national unemployment rate of 6.2% that year. Despite the improvement, however, income inequality has been getting worse in the state. The highest earning 20% of North Carolina households have an average income of more than $166,000, up 3.3% since 2010. Meanwhile, the income of a typical middle class North Carolina household fell by 1.8%, more than twice the comparable national income decline of 0.7%.
Union membership, which is often associated with middle class health, fell 1.3 percentage points to 1.9% in 2014, the lowest share in the country. Low union membership can often make it more difficult for workers to organize and advocate for themselves. North Carolina has resisted workers’ demands to raise the minimum wage above the federal minimum of $7.25 per hour, which many argue would help mitigate income inequality.
5. Tennessee
> Middle income growth 2010-2014: -1.8%
> Fifth quintile income growth 2010-2014: 3.8% (22nd highest)
> Fifth quintile share of income: 51.5% (7th highest)
> Middle class household income: $44,635 (6th lowest)
In 2010, middle class households in Tennessee earned 14.7% of all income in the state, a slightly higher share than that earned by middle class households nationwide. By 2014, that share had dropped to 14.2%, nearly twice the comparable decline across the country. In fact, the share of income controlled by the bottom 95% of Tennessee households contracted between 2010 and 2014, with all income gains going to the top 5%. Those gains contributed to a 7.1% increase in incomes among the top 5% of households, larger than the 6.1% growth for that cohort nationwide.
At 7.0%, Tennessee’s sales tax is among the highest in the country and may contribute to declining middle class incomes. A sales tax causes poorer residents — roughly 18.3% of Tennesseans live in poverty — to pay a larger share of their income in taxes compared to wealthier residents.
To determine the states where the middle class is suffering the most, 24/7 Wall St. used data on the average pre-tax income earned by each income quintile from theU.S. Census Bureau’s 2014 American Community Survey (ACS). We defined middle class as the third quintile, or the middle 20% of earners. We examined the growth in average incomes in the third and fifth quintiles between 2010 and 2014 to identify income trends in the middle and upper class. The final list is composed of states where middle class incomes fell by more than 0.8% and fifth quintile incomes rose by more than 2.5%. Because ACS income data reflect pre-tax levels, they may overstate the degree of income inequality in the poorer quintiles. However, it is unlikely that the tax burden of the third quintile is significant enough to skew the data.
We also looked at data on the share of aggregate income by quintile from the ACS, and how that share changed between 2010 and 2014. Also from the ACS, we reviewed poverty rates and the Gini coefficients. The Gini coefficient indicates the degree to which incomes in an area deviate from a perfectly equal income distribution. Scaled between 0 and 1, a coefficient of 0 represents perfectly equal incomes among all people. All data are from 2010 to 2014. From the Bureau of Labor Statistics (BLS), we looked at annual unemployment rates from 2010 through 2014. The percentage of non-agricultural employees who identify as members of a union came from Tax data came from the Tax Foundation, and reflect sales tax rates as of January 1, 2016.
More on states where the middle class is dying:
Despite being essential to economic growth, middle class incomes have suffered from wage stagnation. According to the Economic Policy Institute, an economic and social policy think tank, one reason that middle class incomes have remained flat for decades is the divergence of productivity and wage growth. Just after World War II — a time many have called America’s golden age — productivity and wages both increased more than 90%. Since 1973, productivity has continued to climb, increasing 74.4%. Meanwhile, however, wages have increased by less than 10%. This means owners and investors, many of whom comprise the wealthiest 20% of households, have by and large reaped the benefits of the greater productivity. The workers, on the other hand, have not seen comparable wage increases.
Wealthier households have also benefited from the strong stock market performance in recent years. Despite weak returns in 2015, all three major U.S. indices hit all-time highs during the year, allowing those with money invested to earn even more. With the rich holding a disproportionately large share of money in the stock market, their incomes have recovered to their pre-recession levels much faster than those of middle class workers.
In all 10 of the states where the middle class is suffering, the share of total income earned by the bottom 80% of households fell from 2010 through 2014 and was redistributed to the highest quintile. The top 20% of U.S. households held more than half of total income in 2014, up 1.08 percentage points from 2010. Even among top earners, income was not evenly distributed. During that five-year period, the top 5% of households accounted for more than 85% of income gains for the top 20% of earners.
Declining union membership may also have contributed to the suffering of the middle class. In 1979, 24.1% of American workers belonged to a union. Today, just 11.1% of Americans are unionized. The decline of union membership has largely mirrored the shrinking of middle class incomes.
A state’s tax environment can also sometimes exacerbate income inequality. A 2015 report by researchers at the Federal Reserve Board of Governors found that federal taxes tend to minimize inequality. States taxes on gas and goods, however, can have the opposite effect. And since these are consumed by rich and poor alike, poorer households tend to pay greater shares of their income on these taxes. In all but one of the states where the middle class is suffering, consumers are required to pay sales tax.

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