Many Californians Struggle to Make Ends Meet Despite a Growing Economy

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.

 

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

Stanford’s “Pathways” Magazine Echoes Our Report’s Key Findings on Poverty

The latest issue of Stanford University’s Pathways, a magazine featuring articles about poverty, inequality, and social policy, perfectly echoes a number of the key messages in our recent report, Five Facts Everyone Should Know About Poverty.

An article by Marianne Page, deputy director of the Center for Poverty Research at UC Davis, for example, calls into question the “common mantra [that] the only enduring solutions to poverty are economic growth and the jobs it delivers.” Page shows that economic expansions reduce poverty less than they did in the past partly because a growing share of the new jobs pay low wages. Similarly, our Five Facts report shows that poverty in California is more often due to low-wage work than to a lack of employment. Like Page, we argue that reducing poverty will take policies that boost workers’ earnings, such as continuing to increase the state’s minimum wage and establishing a state Earned Income Tax Credit (EITC).

Hilary Hoynes, professor of public policy and economics at UC Berkeley, demonstrates the resounding success of the federal EITC in another Pathways article, suggesting that it “may ultimately be judged one of the most successful labor market innovations in U.S. history.” Hoynes writes:

The effects of EITC extend well beyond simple income support and poverty reduction. … It leads to various improvements in the mental and physical health of mothers. It brings about a reduction in low birth weight among infants. And it improves the performance of children on cognitive tests. This burgeoning body of work suggests, then, that income support programs have benefits that extend well beyond an increase in cash flow for families in poverty.

With evidence like that, it’s no wonder that half of all states have created their own EITCs to further leverage the benefits of the federal credit. And it’s why California should do the same. Poverty is a problem state policymakers can address if they choose to prioritize investments in proven strategies.

— Alissa Anderson

Poverty Is a Problem We Can Address

California’s poverty rate is higher than that of all other states, based on the US Census Bureau’s Supplemental Poverty Measure. So it’s not surprising that Californians are increasingly concerned about poverty, and many see it as an intractable problem. More than two-thirds of state residents (68 percent) think that poverty is a big problem facing our society, up from 57 percent eight years ago — a rise that paralleled the increase in poverty during the Great Recession. In addition, fewer than half of Californians (46 percent) believe that policymakers can do much to address the problem.

But poverty is a problem we can address. That’s the key message of the newly released CBP report, Five Facts Everyone Should Know About Poverty. This report shows that we’ve made significant gains reducing poverty in the past, and it provides evidence that anti-poverty efforts continue to be effective today. Tax credits for working families, food assistance, and unemployment insurance, among other policies, lifted an average of nearly 4 million Californians a year — including 1 million children — out of poverty in the wake of the recent recession. This is a significant accomplishment, and it suggests that California can reduce poverty further by making greater investments in what’s already working.

What will it take to cut poverty further?

Reducing poverty will require a broad-based effort to address the various factors that contribute to families’ economic hardship. One of the most significant of these is low-wage jobs. The majority of families living in poverty are working families, which means that poverty is largely a problem of low pay. That’s not surprising given that California’s minimum wage remains a poverty-level wage, in spite of its recent increase to $9 per hour. A mother who works full-time, year-round at the minimum wage brings home just over $18,000 per year. That’s an income well below the federal poverty level for a family of three and just a quarter of what we estimate that a family needs to support a modest standard of living in California.

In our report, we recommend two ways policymakers can boost workers’ earnings in order to lift more families out of poverty. First, they can continue to gradually raise the state’s minimum wage — even beyond the increase to $10 per hour that is scheduled for 2016 — and then tie it to inflation so it keeps pace with increases in the cost of living. Second, they can create a refundable state Earned Income Tax Credit (EITC), which would help low-income working families keep more of their earnings and better meet their basic needs.

The federal EITC is one of the most effective tools for cutting poverty. In fact, it pulls more children out of poverty than any other federal policy. Half the states have created their own EITCs to further leverage the benefits of the federal credit, and establishing a refundable state EITC in California would be as easy as adding one line on state tax forms. This simple measure could bring nearly 170,000 Californians out of poverty each year, according to estimates from the Center on Budget and Policy Priorities.

As with any new policy, lawmakers are certain to ask whether California can afford to create a refundable state EITC. But a better question is whether California can afford not to invest in a policy that is proven to cut child poverty more than any other measure. Allowing poverty to persist is extremely costly, both in human and economic terms. Children who grow up in poverty don’t have a fair chance to reach their full potential. They face numerous obstacles that make it harder to do well in school and get good jobs as adults. That means poverty doesn’t just set children on a path toward future hardship, it also puts California’s future workforce at stake.

The good news, however, is that when low-income families’ incomes are boosted through public supports like tax credits, their children tend to attain higher levels of education and perform better academically. They may even earn more in the future. In other words, investing in proven anti-poverty strategies has a long-term payoff that makes the investment well worth its upfront cost.

Cutting poverty lays the groundwork for a stronger economy and a more prosperous future for all of us. That’s why policymakers should make reducing poverty a key state priority. And that’s also why we at the CBP have launched an initiative to greatly expand our work on poverty over the next couple of years. Watch for our additional reports on key poverty-related issues, including analysis and commentary that will help policymakers determine and prioritize policy options to expand economic opportunity and generate more broadly shared prosperity in our state.

— Alissa Anderson

New CBP Report Looks at What It Takes to Make Ends Meets Across California

Many families across California struggle to cover the costs of housing, child care, and other necessities, according to a new CBP study released today. This analysis underscores the need for targeted public policies that help boost workers’ earnings and that help Californians pay rent or buy a home, afford child care, and cover other basic family costs.

Making Ends Meet: How Much Does It Cost to Raise a Family in California? looks at the income needed to support a family with two children or to live as a single adult in California, allowing only for basic expenses: housing and utilities, child care, health care, food, transportation, and other necessities.

The CBP’s analysis finds that for a California family of four with two children and one working parent, it would take — on average — an annual income of $60,771 to afford a modest standard of living. This is equal to an hourly wage of $29.22 for full-time work, which far exceeds the statewide median hourly wage of $19.07 in 2012 and is well above the state minimum wage.

As part of this report, the CBP has launched an online family budget calculator that presents estimated budgets for four family types in all 58 counties. Also available online are fact sheets that provide the estimated family budgets by county and at the state level.

Making Ends Meet highlights some of the specific economic challenges faced by California families. These include:

• A lack of affordable housing in California. High housing costs in California present a major hurdle for many individuals and families. In 2012, nearly one-third of households (30.5 percent) spent at least half of their income on rent. In addition, from 2010 to 2012, California’s homeownership rate was the second-lowest of all states, averaging 54.9 percent.

• High child care costs. The CBP’s analysis estimates that child care costs in California average more than $1,100 a month for families with two children. State policymakers have cut support for child care and state preschool in recent years. Between 2007-08 and 2013-14, combined funding for California’s child care and state preschool programs fell by nearly 40 percent, after adjusting for inflation, resulting in the loss of 110,000 funded “slots” in these programs.

• Rising family health care costs — which implementation of federal health care reform will help address. The cost of health coverage has risen sharply over the last decade in California — increasing at roughly five times the rate of inflation between 2002 and 2012. Statewide, the monthly cost of health care — including insurance premiums and out-of-pocket costs — averages nearly $500 for an individual and slightly more than $1,400 for a two-parent family with two children, according to CBP estimates. In many California counties, health care costs are the largest single expenditure in the basic family budget. Beginning next year, subsidies provided by the federal Affordable Care Act will lower insurance costs for certain families who purchase their own health coverage.

The Making Ends Meet report — including the online family budget calculator — is available at www.cbp.org/MakingEndsMeet.

— Steven Bliss

Setting the Context: CBP Testimony on Key Economic and Wage Trends

As we blogged about, the University of California, Berkeley’s Institute for Research on Labor and Employment (IRLE) last month released a major report on the social and economic costs resulting from low-wage work in the fast-food industry. Yesterday in Sacramento, the Assembly Labor and Employment Committee and the Senate Labor and Industrial Relations Committee held a joint informational hearing on fast-food industry employment and the policy challenges presented by low-wage work.

CBP Policy Analyst Luke Reidenbach led off the meeting with invited testimony on California’s current job market and what the latest wage and employment trends mean for the state’s residents. Luke’s remarks were based on his analysis in a recent CBP report — Uneven Progress: What the Economic Recovery Has Meant for California’s Workers — and highlighted the fact that recent job growth has not translated into wage gains for many workers.

If economic growth were broad-based, workers across the wage distribution would be seeing real gains in their wages.  However, so far in this recovery only high-wage workers — which we define as those falling into the top 20 percent — have seen any significant wage gains over the last few years.

Read the full testimony.

To further assess how well California’s economy is working for families across the state, the CBP later this year will release an analysis of what it takes to make ends meet in California, including a look at how typical wages stack up to the costs of basic necessities.

— Steven Bliss