Monday, September 26, 2011

Our Expanding Income Gap and Why It Matters

In 1958 the top 10% income share, including capital gains (income from investments), accounted for 33.56% of the wealth in the US. By 2008 this figure had risen to 48.23%. This means that in 2008, the 10% most wealthy people in America owned nearly 50% of our country's income.

What impact does this shifting of wealth have on other economic classes?

Well, before we launch into this examination it would help to delineate America's "official" economic classes. The challenge is that there are numerous opinions about income thresholds and education and job-type parameters for grouping economic classes, and I have been unable to find a digestible chart. So I have taken the liberty of distilling and combining several models to come up with the simplified outline shown below. Amounts are in 2011 dollars. I am not suggesting that my version is academically sound, but it's close enough for these purposes.

The Top 400 - Owners of one or more mega corporations, Investors at a planetary level. Net worth over $1billion
The Super Rich - Includes most senior executives, celebrities, and heirs. Annual income over $700,000 
Upper Middle Class - Includes sought-after professionals, and senior managers. Annual household income over $120,000
Middle Class - Includes middle managers, other professionals and white collar workers. Annual household income over $75,000
Working Class (Upper bracket earns a Living Wage)- Includes blue collar workers. Annual household income over $50,000
Lower Class (Subsistence Workers) - Includes clerical and apprentice blue collar worker. Annual household income over $22,314 (2011 poverty level)
Working Poor - Entry-level, unskilled, minimum wage workers. Family household income less than $22,314 (2011 poverty level)

The populace in the first four economic classes are doing at least well in terms of economic stability and well-being. It is the people that fall into the last three classes that are struggling, particularly the Lower Class and the Working Poor. And, as the gap between the very wealthy and the middle class steadily expands, the number of people in the last three classes is steadily increasing.

If we do not take measures to reduce this gap or at least halt further expansion, our economic demographics could morph into those of a third world country.

How so?

Let's start by looking at the Working Class, where people in the upper bracket of that class earn what's called a Living Wage.

A Living Wage is household income that is of a sufficient level so you can...
  • afford an appropriately sized, properly-maintained home in a safe area where your children can play outside without armed supervision
  • buy healthy food products and feed your family well-balanced meals. 
  • purchase health care insurance for your family. By so doing, you can safeguard the health of your family through annual medical examinations and other routine care, and get treatment for medical issues if discovered.
  • afford a reliable car that will get you back and forth to work, so you do not lose your job because of transportation problems.
  • dress your family in a neat and tidy fashion, but not in designer or psuedo-designer clothes. 
  • afford modest recreation and entertainment, such as taking the family to an occasional movie or an afternoon at the County fair.
  • save some money for emergency situations, fuel a college fund for your children, and perhaps even invest a little money for retirement.
  • live debt-free, except for your mortgage and perhaps a car payment.

Families, couples, and singles who earn a Living Wage typically have full-time jobs with at least some benefits. They are often skilled blue collar workers such as auto mechanics, plumbers, electricians, etc. These folks are generally healthy, contribute to society, are less prone to criminal acts, and are often able to "progress" in terms of bettering themselves and/or their children.

People who earn a Living Wage fall into the upper bracket of what is often referred to as the Working Class and also help to populate the lower bracket of the Middle Class.

How much a person or family must earn to be considered a Living Wage largely depends on where they live and how many children they have. Let's look at three scenarios:

Scenario #1
A family of four. Mom and Dad both work and the children are 7 and 10 yrs old. They hold a mortgage on a modest home and have two cars (except in New York City - they use public transport there) so they can get to work and take the kids around. The average price of gas in the US is $3.50 and each car gets around 25 MPG. Our family drives a total of 350 miles per week.

Scenario #2
A couple with no children. They both work and hold a mortgage on a modest home. They each have a car (except in New York City - they use public transport there) so they can get to work. The average price of gas in the US is $3.50 and each car gets around 25 MPG. This couple drives a total of 300 miles per week.

Scenario #3
A single working adult that  holds a mortgage on a modest home. He/she has a car (except in New York City - uses public transport there) so he/she can get to work. The average price of gas in the US is $3.50 and the car gets around 25 MPG.  This person drives a total of 150 miles per week.

Here is a summary chart showing what I have calculated to be a Living Wage for each of these scenarios. The figures shown is annual gross (before tax) household income for that particular region.

Click on image for larger view

See below for charts detailing how I came up with these income figures. As you look at these charts, you may find it interesting to compare the Living Wage hourly rate (highlighted in yellow) with the minimum wage for that state.

Anyway...

Now let's look at the so-called Lower Class, or what I refer to as Subsistence Workers.  These people also help to populate the lower bracket of the Working Class.

Subsistence Workers generally work full time whenever possible, or will work two or even three part time jobs when they cannot find a full-time job. They barely make enough money to live on. Because they earn more than the poverty level, they have trouble qualifying for assistance. They rarely work in jobs that offer health care coverage and cannot afford to purchase their own health insurance. Subsistence workers sometimes lose their jobs because they cannot afford a reliable car. They more often rent housing instead of buying, and are unable to save money for emergencies, college, or retirement. Subsistence workers live paycheck-to-paycheck; if any unexpected expense comes up, such as a car repair or medical bill, they do not have the financial resources to handle the situation and it can stop them in their tracks.

Subsistence workers frequently experience health issues, have little to contribute to society, and find it very difficult to "progress" in terms of bettering themselves or their children. They are treading water as fast as they can, but often end up sinking into debt and, ultimately, into poverty. At which point they become part of the Working Poor.

According to the US Department of Labor, the Working Poor "are persons who spent at least 27 weeks [in the past year] in the labor force (that is, working or looking for work), but whose incomes fell below the official poverty level."

The official poverty level in 2011 for a family of four is $22,314 or less (before tax is deducted). A family that earns $22,314 per year is left with a whopping $1525 per month after paying income tax and social security (assuming a combined 18% rate) This is $355 a week for two adults and two children. And these number apply to both high cost-of living places such as New York City and low cost of living areas such as Tulsa, OK. No wonder folks are heading south.

How in the world can a Working Poor family even survive on $355 per week, much less get ahead?

The Working Poor rarely have full-time employment. They mostly work part-time jobs for minimum wage and no benefits. They do not make enough money to live on so they move in with friends and relatives. This is how 6 people can end up living in a 2-bedroom apartment in the Projects.

Working Poor usually qualify for assistance such as food stamps, subsidized housing, etc. They often resort to criminal behavior to generate more income, and fall into patterns of drug and alcohol abuse and addiction. It takes significant determination and help from a mentor or organization for a Working Poor person to find a way to "better" himself and escape these circumstances. For most, the outlook is grim.

According to the US Census Bureau, "There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009 ─ the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published."

The 46.2 million people living in poverty in America in 2010 comprised around 14.3% of our total population. But how many people are Subsistence Workers - those who make more than the Poverty level but less than a Living Wage?  Well, extrapolating from IRA and Census Bureau data, a conservative estimate is that Subsistence Worker households made up 35-40% of our 2010 population.

This means that at least half of our population is barely getting by or living in outright poverty. Fine, but why is this a big deal... why should we care?  Aside from social conscious, we should care because the growing number of economically depressed households (1) impacts the present and future quality of our labor force, and (2) places an ever-burgeoning economic strain on our country in terms of Medicaid and "Government transfers" (welfare).

If America does not take action to reduce this gap or at least halt further expansion between the very wealthy and the middle class, our economic demographics could eventually resemble those of a third world country.


So the trillion dollar question is: what is the best way to address this problem? 


Detailed Charts on Living Wage - As you look at these charts, you may find it interesting to compare the Living Wage hourly rate (highlighted in yellow) with the minimum wage for that state.
FAMILY OF FOUR - click image for larger view
COUPLE, NO CHILDREN - click image for larger view
SINGLE ADULT - click for larger view

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