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An Ever Increasing Divide

Census data suggests that the prospect of economic mobility for America's working families is more challenging than ever.

This week, the U.S. Census Bureau released the national numbers on income, poverty, and health insurance coverage. Coming on the heels of 10 years of Welfare Reform and on the anniversary of Hurricane Katrina, much of the Administration’s focus has been on the poverty rate that has not changed from last year and the slight increase in median household income. Yet for the 37 million people living below the poverty line – about the size of the state of California – the economic outlook is far from positive. The data points to a growing trend of income inequality between the country’s richest families and everyone else, suggesting that the prospect of economic mobility for America’s working families is more challenging than ever.

The census figures point to an ever-shrinking middle class. Since 2000, the fraction of American households with incomes between $25,000 and $100,000 a year has declined by 1.3 percentage points, whereas the number of households earning more than $100,000 a year has held steady.  So where did this 1.3 percent of households go?  Not surprisingly, to the bottom of the income distribution.  Specifically, the percentage of American households who earn less than $25,000 a year increased 1.4 percentage points during this same period, which equates to nearly 3.2 million more American households living below the $25,000 threshold in 2005 than in 2000. 

Middle class families are not the only ones who have fallen.  Even those families already at the bottom of the income distribution (i.e., below the $25,000 threshold) have experienced a decline.  The new census figures show that 43 percent of the poor now live at half the poverty line (i.e., “deep poverty”), which, for a family of four means they live on a little less than $10,000 a year. This is a 1 percent increase over 2004, which equates to approximately 300,000 more people living in “deep poverty” in 2005 than the year before.  This is also the highest percentage of people living in “deep poverty” on record (the U.S. Census Bureau started collecting this data in 1975).

While the downward economic spiral of America’s poor and middle class families is bad news enough, it is made all the more disturbing when the rise in inequality is considered. The average income for households in the bottom 20 percent of the income distribution is just $10,655 compared to $159,583 for those in the top 20 percent – a staggering 1,500 percent disparity and the highest percentage disparity on record. This top 20 percent of households now brings in 50.4 percent of all the income, compared to just 12 percent for the bottom 40 percent of households combined. Again, this is the highest share of income going to the richest 20 percent of households on record.

The Census figures show that minorities and women are the furthest down the economic ladder. While blacks are only 12.5 percent of the total U.S. population, they represent 25 percent of all people living below the poverty line. 12 percent of all black people live in “deep poverty,” as compared to 3.5 percent of whites and 8.6 percent of Hispanics. In addition, the median earnings for females declined for the third consecutive year to $31,858 (which is 77 percent of male earnings), and another 321,000 single female-headed households fell below the poverty line.

These disturbing trends have significant consequences for the economic mobility of low- and middle-income American families. Recent evidence indicates that the economic status of parents plays a significant role in determining the economic success of children, particularly for those at the bottom of the income distribution. In a report for the Center for American Progress, economist Thomas Hertz noted that children from lower-income families have only a 1 percent chance of reaching the top 5 percent of the income distribution, versus children of wealthier families who have about a 22 percent chance. Consequently, more families below the $25,000 income threshold or in deep poverty mean fewer children will have a shot at the American Dream.

The steady rise in income inequality only exacerbates this challenge of upward economic mobility. Economists – such as Isabel Sawhill of the Brookings Institution who made the point at a Center for American Progress forum on economic mobility – have argued that growing income inequality makes economic mobility more difficult because as the “rungs on the ladder” get further and further apart, it becomes increasingly difficult for families to climb up.  In other words, the challenge that low-income and middle class families face in trying to move up the economic ladder is greater when they have to travel a farther distance to get there.

Although we have been in the midst of an economic recovery for the past few years, the new census figures prove that not all Americans have been benefiting.  This is further evidence that tax cuts for the rich are not the answer for improving the economic opportunities of everyday, working families. What we need are common-sense policies that allow the benefits of economic growth to be shared widely.  This requires, for example, greater investment in public education, incentives to create job growth, comprehensive health care reform, alternative energy strategies, and a higher minimum wage.  Without such policies, we can expect next year’s census figures to paint a similarly bleak economic picture of America’s working families.

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