Engines of Inequality

Iowans and their families share a set of basic expectations and assumptions: that hard work and educational advancement will lead to a good job; that with a good job come the benefits necessary to assure family security; and that — if personal troubles or a downturn in the business cycle undercut those opportunities — a safety net of public programs will help them land on their feet.

Figure 19. U.S. Income Gap Widening

Click above for Figure 18: U.S. Income Gap Widening, 1989-2010

Not much of this is true anymore. Wage, income and wealth inequality has grown steadily over time — and starkly across the last two business cycles. Nationally, while the wages and incomes of ordinary Americans have grown little (and for some not at all), the richest 1 percent saw their incomes increase nearly threefold in the last 30 years.[i] Wealth is even more skewed, with the top 1 percent controlling nearly 40 percent, more than the combined wealth of the bottom 90 percent. This inequity was sharpened by the housing crash and its blow to home equity: between 2007 and 2010, the median American family lost almost 40 percent of its net worth — leaving most Americans roughly where they were in 1992. The graph above [Figure 18] illustrates how much better things have gotten for households with incomes at the top (blue line), compared with all families, marginal-income families (second-lowest 20 percent), and households where the head of the household has less than a high-school education.

These numbers are not as stark for Iowa, for a couple of reasons. We were largely spared the damage of the housing crash, and did better than most in the recession that followed. And, as the top 1 percent of earners pull away from the rest, their presence in Iowa (a state with a small share of high earners) is slight.

Figure 20. Steady Growth in Wage Inequality for Men and Women in Iowa

Click above for Figure 19. Steady Growth in Wage Inequality for Men and Women in Iowa

Nevertheless, we have seen a steady growth in inequality in Iowa across the last generation. One index of this is the ratio of wages at the 10th (low), 50th (median), and 90th (high) percentiles. Figure 19 traces these ratios over the last generation. A higher ratio (an upward movement in the line) represents a widening income gap. For the first half of this era, most of the growth in inequality can be seen in the widening gap between low and median-wage workers. After the late 1980s, inequality at the lower end of the wage spectrum flattens out. From this point, growth in overall inequality is driven largely by higher earners (90th percentile and above) pulling away from the rest.

Figure 21. As Union Coverage Falls, Inequality Rises

Click above for Figure 20: As Union Coverage Falls, Inequality Rises

Wage weakness and rising inequality are not simply unfortunate reflections of economic change. They represent political choices that have both failed to respond adequately to that change, and weakened the policies and institutions upon which working families depend. The erosion of collective bargaining, for example, has undermined the security of Iowa’s working families. By most estimates, declining unionization accounted for about a fifth of the increase in national inequality in the 1980s and 1990s.[ii] But it played a lesser role after that, an era in which the decline in union density slowed and inequality grew more markedly at the top of the income scale. The relationship (illustrated online in Figure 20) between union coverage and inequality varies widely by state but, since 1979, all — including Iowa — have seen union coverage fall and inequality rise. Unions have lost ground largely as result of public policies that have directly targeted the reach, legitimacy and effectiveness of collective bargaining. These include so-called “right-to work” laws (Iowa touts its “right-to-work” status at the top of the list of the state’s “business advantages”), a dramatic tilt in favor of employer interests in the administration of labor laws governing collective bargaining and organizing, and of course the recent offensive against public-sector unions in a number of states.

Or consider the recent trajectory of the minimum wage.[iii] The last increase is now 3 years old — almost 5 years old in Iowa, which raised its state minimum wage earlier. Since the minimum wage does not rise with inflation, it is now in real dollars well behind its peak purchasing power: If the minimum wage had kept up with inflation since 1968, its historical high point, it would now be over $10.50 per hour [Figure 21].

Figure 22. The Minimum Wage, in 2011 Dollars, Has Been On the Decline for the Past 40 Years

Click above for Figure 21: The Minimum Wage, in 2011 Dollars, Has Been On the Decline for the Past 40 Years

Not only are our basic labor standards slipping, but the standards we do have (including not just the minimum wage, but also federal regulation of overtime, and state and federal regulations governing things like payroll deductions and tipped wages), often go unenforced. Violation of wage and hour laws, or “wage theft,” is a widespread problem with enormous costs and consequences — for workers, for responsible employers, for communities, and for state and federal budgets. Every dollar stolen from a worker’s wages is a dollar less in the pockets of workers, a dollar not spent on local goods and services, a dollar that is not counted in the calculation of payroll and income taxes. Our recent report on this, Wage Theft in Iowa, estimates the cost to Iowa workers, in unpaid wages at close to $600 million a year; and the cost to the state, in unpaid taxes and social insurance, at another $60 million.

State and federal policies can address some of this damage, but our basic work-support policies do a poor job of closing the gap — widening for many Iowans — between wages and the costs of living. One of the key policies, in this respect, is the Earned Income Tax Credit (EITC) — a provision in federal and state codes that reduces the tax liability of low-income working families. The basic principle behind the EITC is that income needed to sustain a family should not be subject to tax, and that work should be encouraged as a pathway out of poverty. But the Iowa EITC (7 percent of the federal EITC) is insufficient in that respect: It provides some relief to single-parent households, but leaves many poor married families with children still subject to Iowa taxes when they are not subject to federal income taxes. Increasing the EITC would help to supplement the incomes of low-wage workers and lift thousands of low-income Iowans — many of them children — out of poverty.

In turn, other work-support programs (including child care assistance, food stamps, low-income heating assistance, and public health insurance) phase out at different income thresholds, often precipitously, in such a way as to actually undermine work rewards and incentives. The upper income-eligibility thresholds of these programs become precarious cliffs: Earn one penny more, and the loss of eligibility, particularly for child care assistance, can result in a dramatic loss in disposable income. This problem is starkest in Iowa cities and counties where the cost of living is highest, and where these losses can mean the difference between breaking even or not.

NEXT: Moving Forward >>>

On the broader benefits of collective bargaining, see David Madland, Nick Bunker and Karla Walter, Unions Make the Middle Class (Center for American Progress, April 2011); and Larry Mishel, The Right to Organize, Freedom, and the Middle Class Squeeze (EPI, March 2007).

On the EITC, see the work of the Iowa Fiscal Partnership, and the State’s own  (Department of Revenue) glowing assessment of its importance.

On “cliff effects,” see our report Making Work Pay (February 2011), as well as our ongoing work on the cost of living in Iowa.

[i] For national income patterns, see Congressional Budget Office, Trends in the Distribution of Household Income Between 1979 and 2007(October 2011). For wealth, see Federal Reserve, Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances (June 2012). A good current digest of inequality measures is maintained by the Institute for Policy Studies at

[ii] David Card, Thomas Lemieux and W. Craig Riddell, “Unions and Wage Inequality,” Journal of Labor Research 25, Fall 2004.

[iii] Recent work by the Center for Economic and Policy Research has underscored the declining real value of the minimum wage, a pattern which is especially troubling given the steep increases in key family expenses (such as health insurance or higher education), and the rising educational attainment of low-wage workers.

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