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Middle Income Households Continue to Lose Ground Despite Improving Economy

Data [1] released Wednesday by the Census Bureau show that the middle class lost ground in terms of income for the fourth consecutive year. This slump occurred even though the economy was growing, albeit modestly. In 2011, real household income in the middle of the income distribution was $50,054, a 1.5 percent ($780) decline since 2010. These households are bringing home less real income than they did in 1996. Since 2007, the year the Great Recession began, median household income dropped by 8.1 percent ($4,400).

Working age households in the middle of the income distribution were hit even harder in 2011. Median household income for this group was $55,600, falling by 2.4 percent [2] ($1,400) since 2010 and 9 percent ($5,700) since 2007. Workers’ wages are falling behind even though productivity is up in the nation [3]. Budget and Tax Center research [4]shows that North Carolina’s workers’ pay growth is also lagging far behind productivity gains.

Well, if the middle class lost ground and the poverty rate was unchanged [5] during the same time period, to whom did the economic gains accrue? Preliminary* Census data show that the benefits of the economic growth flowed to top earners. From 2010 to 2011, the share of income [6] going to the top fifth of households rose by 1.6 percent to reach 51.1 percent of all national income—the highest share on record since 1967 [2]. In contrast, the share held by the lowest three fifths of households was the lowest share on record since 1967, reaching only 19.5 percent—2.8 percentage points lower than the share held by the top 5 percent. In other words, the top 5 percent of households have more income than the bottom 60 percent of households.

The widening income gap is not a new occurrence. As this chart [7] shows, income inequality has been indisputably trending upward since the late 1960s. Research [8] conducted by the Budget and Tax Center shows that there is also widespread inequality in North Carolina. Other research shows [9] that income equality is a key condition in promoting and sustaining economic growth.

Economic growth is needed to help those struggling to make ends meet but it is not enough. Policymakers need to enact policies that grow our economy equitably and address the rising gap between compensation and productivity. We need to invest in tools that support equality of opportunity for all people and in the meantime provide adequate services to those in need. We can no longer afford to accept an economy that is only designed to work well for the top earners rather than also improving the living standards of everyone else.

*This preliminary data excludes capital gains and non-cash benefits. Nevertheless, the data provides a  beneficial look at income inequality.