CHAPTER 4
A CHANGING NATION—WEALTH AND INCOME DISTRIBUTION

The U.S. Census Bureau has released a number of studies showing a change in the distribution of wealth and earnings in the United States. This change has resulted in an increase in the gap between the rich and the poor. Unlike many short-term economic changes that are often the product of normal economic cycles of growth and recession, these changes seem to indicate fundamental changes in American society.

GROWING INCOME INEQUALITY

The Census Bureau has tracked a growing inequality in income in the United States that began in the 1980s. For comparison purposes, the bureau divides the population into five income groups (quintiles). In 2001 the income differences were close to record highs, with only the top fifth having increased its percentage of the nation's income since the 1980s. According to the Census Bureau's Historical Income Table for income dispersion among the five quintiles, the average income of the top fifth of households, after adjusting for inflation, was 27.7 percent higher in 2001 than in 1990. In contrast, the average income of the poorest fifth of households was only 7 percent higher than in 1990. Census data show that in 2001 the quintile of households with the highest incomes received 50 percent of the national income, about the same as that received by the other 80 percent of the population combined.

Why Is the "Income Gap" Growing?

Many reasons exist to explain the growing inequality, although observers disagree about which are more important. One reason is that the proportion of the elderly population, who are likely to earn less, is growing. Using the data from the Census 2000, the bureau has analyzed income data as it relates to various characteristics, including race, age, employment, and education level of householder, as well as type and size of household. These data showed that in 2001, 20.6 percent of all households were headed by a householder sixty-five years of age or older. (A "household" may consist of a single individual or a group of related or unrelated people living together, while a "family" is made up of related individuals.) In addition, more people are living in nonfamily situations (either alone or with nonrelatives). In 2001, 32 percent lived in nonfamily households, which tend to earn about half the median income of family households. (See Table 4.1.)

Also contributing to growing income inequality is the increase in the number of households headed by females, as well as the increase in labor force participation of women. In 2001 the proportion of female-headed households constituted 29.8 percent of all households in the nation. (See Table 4.1.) Female-headed households typically earn significantly less than other types of households. According to the U.S. Census Bureau in "Facts for Features" (February 14, 2003), on average, women earn 76 percent of what men earn.

Other factors that contribute to the growing income gap include the decline in the influence of unions and the changing occupational structure, in general, from better-paying manufacturing positions to lower-paying service jobs. The average wage paid to less-educated workers (after adjusting for inflation) has actually dropped since the 1980s. In 2000 the annual income of male workers who attended one to three years of high school without graduating was 21.5 percent lower than in 1980. High-school graduates experienced an 18 percent wage decline. In addition, the proportion of low-wage workers who receive employer-based health insurance and pension benefits dropped significantly between 1979 and 2000.

MEDIAN HOUSEHOLD INCOMES

Table 4.2 shows the distribution of median income for households from 1967 to 2002. ("Median" means that half the measured values are above the specified value and half are below.) In 2002 median income was $42,409, 10.2 percent above the level ten years earlier and 30.1 percent

above the 1967 level. In 1967, 22.2 percent of households earned less than $15,000 per year, and 24 percent earned $50,000 or more. By 2002, 16.1 percent earned less than $15,000 while 43.4 percent earned $50,000 or more.

Types of Households

In 2001 family households made up nearly 68 percent of all households in the United States. Their median income was $52,275. The type of household, however, made a big difference in income level. The median income of families headed by married couples was $60,471. But male householders with no wife present made only $40,715, and female householders with no husband present earned only $28,142. Nonfamily households showed consistently lower median incomes. Female householders living alone earned only $17,868, the lowest median income. (See Table 4.1.)

Race and Hispanic Origin

The level of income also varied widely by race and ethnicity. According to the U.S. Census Bureau in Income in the United States: 2002 (Washington, DC, 2003), in 2002 the median income for non-Hispanic, white alone households (meaning those households for which respondents indicated one race, in this case white, non-Hispanic) was $46,900; for African-Americans alone, $29,026; and for Hispanics alone, $33,103. Across the scale, African-American and Hispanic households tend to have lower earnings than non-Hispanic white households. More than 27 percent of African-American

alone households earned less than $15,000 per year, compared to 19.1 percent of Hispanic households and 13.9 percent of non-Hispanic white households from the alone category. Minorities were also less likely to have high incomes. While 16 percent of non-Hispanic, white alone households earned $100,000 or more in 2002, only 6.4 percent of African-American alone households and 7.2 percent of Hispanic households earned that much.

Age

The age of the householder is also a factor in the level of income. For example, in 2001 householders age sixty-five and older, who are usually past their peak earning years, had a median income of only $23,118, while householders under age sixty-five had a median income of $49,227. Those from forty-five to fifty-four, the highest-earning age group, had a median income of $58,045. (See Table 4.1.)

Work Experience

Although working is an important factor in avoiding poverty, working in itself may not be enough to save a household from poverty. Of the 100.7 million full-time, year-round workers in the United States in 2002, more than 2.6 million did not earn enough to exceed the poverty threshold ($9,359

for a single person under age sixty-five, $18,556 for a family of four). Of all workers, full-or part-time, nearly six percent remained in poverty. However, those who worked did fare better than those who did not, with 5.9 percent of workers in poverty compared to 21 percent of those who did not work at all during 2002. (See Table 4.3.)

Education

Not surprisingly, the more education a person has, the more likely he or she is to earn a higher income. For example, according to U.S. Census Bureau historical income tables for 2000, for men with doctoral degrees, the median personal income was $70,961, and for women with doctoral degrees, the median personal income was $50,430. For those with less than a ninth-grade education, men earned a median income of $17,658, and women earned a median income of $11,370. High-school graduates (including those with general equivalency diplomas) fared better, with men earning $30,665 and women earning $18,393.

Ratio of Income to Poverty Levels

For purposes of analysis, the Census Bureau uses income-to-poverty ratios, calculated by dividing income by the respective poverty threshold for each family size. The resulting number is then tabulated on a scale that includes three categories, "poor," "near-poor," and "non-poor." Poor persons have a poverty ratio below 1.0. Persons above the poverty level are divided into two groups: the "near-poor" and the "non-poor." The "near-poor" have a poverty ratio between 1.00 and 1.24 (100 percent to 124 percent of the

poverty level), and the "non-poor" have an income-to-poverty ratio of 1.25 (125 percent of the poverty level) and above.

In 2002, 12.1 percent of the total population had income-to-poverty ratios under 1.00; in other words, close to 34.6 million persons in the United States had incomes below the poverty threshold. Those under eighteen years of age were most likely to be poor (16.7 percent of the juvenile population), followed by those ages eighteen to twenty-four (16.5 percent of the population for that age group). More than 18 percent of families with children under six years of age had income-to-poverty ratios below 1.00, driven by the large number of female-headed households, which typically have lower incomes. In addition, nearly a quarter (22.9 percent) of all single females had ratios below the poverty threshold. (See Table 3.4 in Chapter 3.)

Of the total population, 4.4 percent (12.5 million people) had an income classified as "near-poor," between 100 and 125 percent of the poverty threshold. (In Table 3.4 in Chapter 3, the right-hand column labeled "Under 1.25" includes all those with an income-to-poverty ratio of less than 1.25. Consequently, this figure includes both poor and near-poor. To calculate the figures on only the near-poor, figures in the middle column, "Under 1.00," must be subtracted from figures in the column "Under 1.25.")

NET WORTH OF HOUSEHOLDS

Income is one measure of a household's economic well-being; another measure is net worth, that is, the value of assets (what a person owns) minus any debts (what a person owes). In 2000 the median net worth of all households was $55,000 or $13,473 when home equity was excluded. While the median net worth of the lowest quintile was only $7,396, the median net worth of the highest quintile was $185,500. (See Table 4.4.)

Race and Hispanic Origin

The Census Bureau found huge disparities in net worth among the various sectors of society. The overall median net worth of a non-Hispanic white household in 2000 ($79,400) was more than ten times that of an African-American household ($7,500). In 2000 the highest quintile among whites had a median worth of $208,023, while among African-Americans, the median net worth of the highest one-fifth was $65,141. Among Hispanics, the median net worth of the highest quintile was $73,032. In the lowest quintile, the median net worth of whites was $24,000, while for African-Americans it was only $57, and $500 for Hispanics. (See Table 4.4.)

Age and Household Type

As householders age, they have greater opportunity to accumulate wealth. For many young and middle-aged workers, the accumulation of assets is one of the primary goals of their employment. As workers age and acquire

homes and other investments, their net worth increases; that is, the value of what they own becomes greater than what they owe. (See Figure 4.1.)

Type of Assets

In its surveys, the Census Bureau asks respondents what type of financial assets they own. In 2000 only 7.1 percent of those in the lowest quintile held an interest-bearing account at a financial institution, while 41.9 percent of those in the highest income bracket did. Low-income households held equity in their own homes at a rate of 11.5 percent, compared with 35.4 percent of wealthy households. Upper-income households also held stocks or mutual fund shares and 401k savings plans at significantly higher rates than households in the lower quintiles. (See Table 4.5.)

Households with considerable net worth can generally offer their members greater opportunities. Householders with high net worth are better able to send their children to college, to travel, to help their children financially as they get started in life, to buy the things they want, and to feel more secure. Considerable net worth can buy political influence and power, or at least present the opportunity to meet those who have that power. Net worth is a major factor determining a household's position and power in American society.

Those with the fewest assets and net worth have the least to fall back on if they become ill or lose a job. They are the least able to provide financial support for their children. In addition, they are the least likely to have political power. These are the Americans most likely to fall into poverty if misfortune strikes.

ENTERING AND LEAVING POVERTY

For most poor Americans, poverty is not a static condition. Some people near the poverty level improve their economic status within two years or less, while others at near-poverty levels become poor through economic catastrophes, such as illness or job loss. The Census Bureau collects annual poverty data in its Current Population Surveys (CPS). These surveys, however, do not reflect the dynamic nature of poverty for individual persons and families.

In its Survey of Income and Program Participation (SIPP), the Census Bureau gathered longitudinal information (measurements over time for specific individuals or families) in order to examine poverty over a forty-eight-month period. This makes it possible to measure the movement of individuals and families into and out of poverty (entry and exit rates) and the duration of poverty spells (the number of months in poverty for those who were not poor during the first interview month, but who

became poor at some point in the study). The study defined entry rates into poverty as the percentage of people who were not poor during 1996 but who were poor in 1999. Exit rates from poverty were defined as the percentage of people who were poor during 1996 but who were not poor in 1999.

In Dynamics of Economic Well-Being, Poverty 1996–1999, (U.S. Bureau of the Census, Current Population Reports, July 2003), John Iceland studied data from the 1996 SIPP panel to examine poverty in the period from January 1996 through December 1999. He focused on monthly measures of poverty and distinguished between short- and long-term poverty. Some highlights of the survey include:

• The average annual monthly poverty rate in 1996 was 15.5 percent, representing about 40.9 million people. In 1999 the rate dropped to 12.8, representing about 34.8 million people.

• More than one in three persons (34.2 percent) were poor for at least two months in the four years between 1996 and 1999.
• Some 2.0 percent of the population were chronically poor. That is, they were poor during all forty-eight months from January 1996 through December 1999.
• Nonelderly adults were more likely to exit poverty than children and the elderly.

• Children had the highest entry rates into poverty and, along with retirement-age adults, had a low exit rate.
• More than half of all poverty spells lasted two to four months.

Spells of poverty reported from 1996 through 1999 lasted for varying lengths of time. Over half (51.1 percent) lasted from two to four months, while 11.9 percent lasted more than twenty-one months. (See Figure 4.2.) African-Americans (with a median poverty spell duration of 4.9 months) and Hispanics (with a median of 4.6 months) had longer poverty spells than non-Hispanic whites (3.8 months). For the elderly, the median poverty spell lasted four months. The shortest poverty spells were for families headed by married couples (3.7 months). The longest spells were for female heads of households (5.8 months). (See Figure 4.3.)

Two percent of the population was poor during all forty-eight months from January 1996 through December 1999. African-Americans (5.1 percent) and Hispanics (5.6 percent) were significantly more likely to be chronically poor (poor for a longer duration or more frequently recurring poverty) than white non-Hispanics (1 percent). Almost 6 percent of people in female-householder families were poor continuously for forty-eight months. (See Figure 4.4.)

Characteristics of Those Changing Their Poverty Status

Based on the SIPP interviews, 34.2 percent of those surveyed had experienced poverty lasting for two or more months in the 1996–1999 study period. During that same period, the number of people who exited poverty (14.8 million) was nearly double the number of people who entered poverty (7.6 million).

RACE AND AGE. Of the poor in 1996, non-Hispanic whites (57.1 percent) were more likely to have left poverty by 1999 than either African-Americans (42.4 percent) or Hispanics (41.6 percent). (See Figure 4.5.) Figure 4.6 shows the newly poor as a percent of the population that was not poor in 1996. Non-Hispanic whites were less likely to have entered poverty by 1999 than African-Americans or Hispanics.

The elderly (often on fixed incomes) and children were less likely to exit poverty than were persons of other ages. About 32.4 percent of the elderly and 47.9 percent of children under eighteen years of age who were poor in 1996 were able to escape poverty by 1999. Adults eighteen to sixty-four years of age were the most likely to escape—53.9 percent moved out of poverty. (See Figure 4.5.) However, only 3.3 percent of the elderly entered poverty by 1999, compared to 4.5 percent of children under eighteen years of age. (See Figure 4.6.)

FAMILY STATUS. Families headed by married couples were much more likely than other family types to have left poverty by 1999. Of the poor families headed by married couples in 1996, 59.7 percent were able to escape

poverty by 1999. Only 39.4 percent of the poor families of other types recovered from poverty by 1996. (See Figure 4.5.) Families headed by married couples were also significantly less likely to have entered poverty by 1999. (See Figure 4.6.) With at least two adults in the household, a family headed by a married couple is more likely to have at least one person working than a family headed by a single person.