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The Great Recession and the Rise in Income Inequality

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It is generally acknowledged that the onset of the Great Recession at the very end of calendar year 2007 generated a slew of economic problems, most of which remain with us today at the end of 2010. They encompass a wide array of labor market problems including higher rates of long term unemployment, reduced labor force participation, and increasing underemployment and mal-employment, all of which have grown dramatically over the course of the past three years. From a public policy perspective, it is significant to note that these labor market losses are being borne disproportionately by low income and middle income families while many of the affluent are only marginally affected.

The net result of these adverse labor market developments has been to reduce household incomes more at the bottom and middle of the national household income distribution than at the top. Mean household incomes adjusted for inflation fell by four percent between 2007 and 2009 for households from the lowest to the upper middle segments of the income distribution to under two percent for those at the top. Thus, the degree of income inequality and income concentration increased over the past two years with the top quintile capturing slightly over half of all pre-tax money income in 2009. This disproportionate income share was just shy of the post-World War II record of 50.3 percent recorded in 2006 while in 2009 the top 10% of households captured nearly as much income as the bottom two-thirds!

This rise in household income inequality has taken hold in most states across the country especially in the Northeast corridor (Southern New England, New Jersey, New York) and most dramatically in our nation's capital. On every key measure of inequality the District of Columbia has more household income inequality than any of the 50 states. In 2009, a D.C. household at the 90th percentile of the local income distribution had an annual income that was nearly 19 times higher than a household at the 10th percentile versus a national average of 11 for the same two groups.

The most affluent top twenty percent of the households in the District of Columbia collected just under 56 percent of all pre-tax money income in 2009. The top ten percent alone received nearly 39 percent of all income. In comparison, the bottom 70 percent of D.C. households together only obtained 31 percent of the money income pie. To match the share of income gathered by the top 10 percent, we would have to add all of the income received by the bottom 77 percent of households in D.C. This extraordinarily high degree of income inequality would place D.C. with its Gini coefficient of over 53 percent at the near top of income inequality across the entire globe! Only Brazil, South Africa, and Zimbabwe have a higher Gini. Yet, the major newspapers and media in the District remain nearly completely silent on this critical economic and social issue.

Recent research both here in the U.S. and across the world has shown the numerous adverse economic, education, social, health, and civic outcomes associated with high levels of income inequality, including more crime, more marital dissolution, more financial distress among families, more social alienation, more children born out-of-wedlock, reduced mental and physical health including a higher incidence of mental depression, and lower educational attainment for their children.

The most recent Great Recession has contributed to a worsening in this degree of inequality across the entire country and will create further havoc in the near future, including growing fiscal problems. Yet, few of our national or state political leaders have taken any public stand to call attention to the growing problem of inequality or propose new policy initiatives to help restore future broad based prosperity.

Prepared by Andrew Sum, Center for Labor Market Studies, Northeastern University; and
Marion Pines, Johns Hopkins Institute for Policy Studies