Income Growth Quickest For Top 5%

Income Growth

Over recent decades, the growth in income has been slanted toward upper-income American households. While this is occurring, the middle class has been simultaneously shrinking. Consequently, more aggregate income is now making its way to upper-income household while the portion going to lower-income and middle-income households is shrinking.

The proportion of Americans in middle-income households has also decreased, dropping from 61% in 1971 to 51% by 2019. Since 1971, each decade has seen fewer and fewer adults living in middle-income households.

This decline does not signify total regression, though. Between 1971 and 2019, the proportion of adults in the upper-income band rose from 14% to 20%. At the same time, the share in the lower-income band rose from 25% to 29%. Overall, there was more movement up the income ladder than down.

Middle-class incomes have not grown as rapidly as upper-tier incomes, though. Between 1970 and 2018, the average middle-class income has increased by 49% from $58,100 to $86,600. Upper-income households saw a growth of 64% in the same period, climbing from $126,100 to $207,400. Gains for lower-income households were 43% (from $20,000 to $28,700).

Tepid growth for middle-class household income with fewer households falling in the middle-income tier triggered a sharp fall in the share of income held by the American middle class. From 1970 to 2018m this share fell to 43% from 62%. Upper-income households experienced an increase from 29% to 48%. At the lower end, there was a slight drop from 10% to 9%.

These income trends reflect the widening gap in overall economic inequality in the US post-1980.

Even within the higher-income bracket, income growth has been slanted toward those at the very top. Since 1980, incomes have increased more sharply for the most affluent households (the top 5%) than for those occupying the income strata below. Although the impact of the Great Recession has made this income disparity slightly less pronounced, there is no imminent sign of reversal.

In the 1980s, families in the lowest quintile (the bottom 20% of earners) saw incomes decrease by 0.1% annually. Families in the highest quintile (the top 20% of earners) saw a 2.1% annual increase in income.

Among the top 5% of families, there was even steeper growth in incomes. Between 1981 and 1990, their incomes increased by 3.2% annually.

In this way, the 1980s saw the start of an ongoing state of income inequality in the United States.

The 1990s saw a similar pattern unfold. From 1991 to 2000, families in the top 20% saw incomes grow at an annual rate of 2.7%. Among the top 5% of families, the mean income rise was 4.1%. Compare this to other families where incomes rose by just 1%.

From 2001 to 2010 is a period unique in the post-WWII period. All families experienced a drop in income over this decade. Losses were more pronounced among poorer families.

From 2011 to 2018, there was a more balanced pattern of income growth. Gains were shared more evenly. Nevertheless, income growth still favors the upper strata, with the top 5% of families experiencing bigger increases in income than other families since 2011.

The wealth of American families is no higher than 20 years ago

Beyond income, a family’s wealth is a key marker of financial security. Wealth, also known as net worth, is the value of a family’s assets (home, savings) minus any outstanding debt. When accumulated over time, wealth can provide retirement income, protect against economic shocks in the short-term, and gift future generations with social status and security.

From the mid-90s to the mid 00s, the wealth portfolios of American families increased overall. Housing prices more than doubled during this period while the value of stocks tripled. Resultantly, the net worth of American families rose to $146,600 in 2007 from 1995 levels of $94,700, representing a 55% gain.

This hike in housing prices was a bubble, and a bubble that burst in 2006. As home prices tanked in 2006, the Great Recession of 2007 was triggered. Stock prices were also dragged sharply down. As a result, the average net worth of families fell by 40% from 2007’s peak to just $87,800 in 2013. By 2016, this had risen to $101,800, but this is still short of 1998 levels.

A sharply rising wealth gap

From 1983 to 2001, times were prosperous for families from all incomes tiers, although this period still demonstrated rising inequality. The median wealth of middle-income families increased by 42% from $102,000 to $144,600. For lower-income families, the increase was even greater at 67% (from $12,300 to $20,600). Despite these gains, the increase in median wealth was still higher for upper-income families, rising from $344,100 to $636,000 between 1983 and 2001, an 85% increase.

This wealth gap has continued to widen. The only income tier able to increase wealth from 2001 to 2016 was the upper-income tier. They managed to boost wealth by 33%. Middle-income families, by contrast, saw their net worth shrink by 20% while lower-income families lost 45% of their wealth. Based on 2016 data, upper-income households were 7.4 times wealthier than middle-income families. The upper-income families have 75 times the wealth of lower-income households. Those same ratios were 3.4 and 28 in 1983.

The reason for this situation is that middle-income families depend more heavily on home equity as a source of wealth. The 2006 housing bubble thus impacted these families more heavily than upper-income families. These households derive more wealth from business equity and financial market assets and they recovered more rapidly after the recession ended.

The share of aggregate wealth enjoyed by upper income families is also increasing. From 1983 to 2016, upper-income families has increased by 19% to 79%. The share held by middle-income families was almost halved, falling from 32% to 17%. The share held by lower-income families fell from 7% to just 4%.

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