Many Californians Struggle to Make Ends Meet Despite a Growing Economy

October 10, 2014

The economic recovery has continued to largely bypass low- and middle-income Californians, according to new Census data released last month. These latest Census figures show that California households in the bottom three-fifths of the income distribution saw their incomes essentially stagnate last year, even though the economy had been expanding for four straight years in California and nationally. The absence of any significant income gains is especially bad news given that these households suffered steep declines in their incomes in each of the prior five years.

California households in the bottom fifth, whose incomes fall below about $23,600, fared the worst in recent years. Their average inflation-adjusted income dropped by about 19 percent between 2007 and 2012, then flat-lined in 2013. This means that the lowest-income state residents have yet to gain back any of the nearly $3,000 they lost, on average, due to the weak job market during and in the aftermath of the Great Recession. While sobering, this trend is not entirely surprising given that hourly wages stagnated or declined for low-earning workers throughout the recovery.

High-income Californians also saw their incomes fall in recent years, but unlike state residents at the low end of the distribution, they regained in the last year much of what they had lost in prior years. The average inflation-adjusted income for households in the top fifth dropped by about 8 percent ($18,200) between 2007 and 2012, but then rose by about 4 percent ($9,500) in 2013. This means that in a single year the highest-income households — whose incomes averaged $224,000 — regained more than half of the income they lost, on average. The top 5 percent of California households — whose incomes averaged $399,000 — fared even better: Last year alone, they regained nearly two-thirds of the income they lost during the prior five years.

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The Uneven Economic Recovery Is Exacerbating Inequality in California

As the benefits of recent years’ economic growth largely accrue to Californians at the top of the distribution, income gaps are widening, exacerbating already high levels of inequality in the state. Last year, the average household in the top 5 percent had an income of $399,000 — 31 times the income of the average household in the bottom fifth ($12,700). Just six years earlier, at the height of the housing boom, the average household in the top 5 percent earned 26 times as much as the average household in the bottom fifth. This widening divide means that nearly one-quarter of total household income now goes to the wealthiest 5 percent of Californians, while less than 3 percent goes to the bottom fifth. And as striking as these figures are, they actually understate the extent of inequality in California. This is because they exclude one of the most significant sources of income for the wealthy — capital gains — and also because the Census does not report income changes for most millionaires.

Rising Inequality Isn’t Just Bad for Low- and Middle-Income Families, It’s Bad for the Economy

Should we be concerned that our nation’s economic rebound isn’t translating into income gains for a broad swath of the population? Certainly if you’re among the majority of families who have yet to see their incomes rise after years of decline, you have good reason to be concerned. As one recent New York Times analysis put it: “You can’t eat G.D.P. You can’t live in a rising stock market. You can’t give your kids a better life because your company’s C.E.O. was able to give himself a big raise.” In other words, without broadly shared income growth, an expanding economy can do little to help most families be economically secure or move up the economic ladder.

But there’s another reason we should be worried about uneven income gains. Recent reports, including one by Standard and Poor’s (S&P) Financial Services, have suggested that income inequality could be holding back our nation’s economic growth. One explanation could be that when many people’s incomes don’t keep up with their expenses, they often spend less. And when large numbers of people spend less, businesses produce less. The end result: an economy that grows more slowly than it otherwise would if fewer families were struggling to pay their bills.

Policymakers Can Reduce Inequality in California

But now for some good news: Inequality is not inevitable. As Nobel Prize-winning economist Joseph Stiglitz recently wrote, “widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.” That means policymakers have the tools to reduce our growing income divide and mitigate the hardship it inflicts on low- and middle-income families. One way state policymakers could do this is by making investments to ensure that all children have sufficient opportunities to move up the economic ladder. Increasing access to high-quality education, from preschool through college, for example, would set low-income children on a path toward greater economic security in the future. State policymakers could also take steps to make California’s income tax system more progressive. Creating a state Earned Income Tax Credit (EITC), for instance, would not only help workers with low to moderate earnings better support their families, but it also would reduce after-tax income gaps. To learn more about how California could reduce inequality by establishing a state EITC, watch for our forthcoming publication on the topic.

— Alissa Anderson


The Ripple Effect of Low-Wage Work

October 15, 2013

A new report from the University of California, Berkeley’s Institute for Research on Labor and Employment (IRLE) estimates the public costs of low-wage work in the fast-food industry. In doing so, the report highlights a key and underdiscussed point about low-wage jobs: They don’t just have an impact on the workers themselves; they have an impact on everyone.

The authors estimate the financial costs of providing critical public services to workers who cannot make ends meet because of low wages, insufficient hours, or inadequate access to health care benefits. The study estimates that nationwide, the public costs of providing health care, nutrition services, and cash assistance to fast-food workers amount to nearly $7 billion per year.

The report also busts some pervasive myths about who low-wage workers are. As we have noted in the past, low-wage workers are not just teenagers employed in their first jobs. As the IRLE report points out, more than a quarter of fast-food workers have children, while employees who are younger than 19 years old and living with a parent represent 18 percent of fast-food workers. Overall, for more than two-thirds of fast-food workers, their wages are an essential part of their total family income.

Finally, the IRLE analysis provides further evidence that the recently enacted increase in California’s minimum wage, which takes effect next summer, is good policy for the state. The typical front-line fast-food worker in the US earned $8.69 an hour in 2011, far below the national median wage of $16.57. By this time next year, fast-food workers in California will be earning at least $9 an hour, and by 2016 they will be earning at least $10 an hour. This wage increase will be a critical boost in income that will help workers provide for their families and bring food to the table.

— Luke Reidenbach


New Census Data Show That California’s Poverty Rate Remained High in 2012, Despite Economic Recovery

September 18, 2013

A new CBP report looks at the Census Bureau data released yesterday, which show that despite the state’s emerging economic recovery, California’s poverty rate was essentially unchanged in 2012 — at 15.9 percent — and remained about one-third higher than in 2006, the year before the recession began. The new Census data show that more than 6 million Californians had incomes below the federal poverty line and that 2.1 million of the state’s children — nearly one out of four — were living in poverty.

The new Census data also show that the state’s median household income in 2012 was $57,020, nearly 10 percent below what it was in 2006, after adjusting for inflation. One positive trend in the new Census data is in the area of health coverage, with a significant year-to-year drop in the share of Californians who are uninsured as well as longer-term gains in providing health coverage for children.

Like our recent report on employment and earnings in California, this new analysis underscores that many of the state’s residents continue to face severe economic challenges in the aftermath of the Great Recession. That’s why it’s critical that policymakers sustain a strong social safety net for individuals and families, while also making the necessary public investments in education, job-related services and supports, and other foundations of widely shared economic growth.

— Steven Bliss