Income Growth by Income Group: Minnesota vs. U.S.

Minnesota fared better than the national average in terms of income growth since the Great Recession, based on Census Bureau data summarized in a September 21 North Star article. A deeper dive into another batch of recently released data from the American Community Survey (ACS) shows that within every income group, average incomes in Minnesota have either grown more rapidly or declined less rapidly than the national average since the onset of the Great Recession in 2007.

The ACS breaks down national and state populations into six income groups. The bottom quintile consists of the twenty percent of the population with the lowest household income. The second quintile consists of the next twenty percent of the population by income, followed by the third (or middle) quintile and the fourth quintile. Due to the tremendous variation in incomes within the fifth (or top) quintile, it is divided into two parts: the next 15 percent (consisting of the bottom three-quarters of the top quintile) and the top five percent.

Based on data for the entire U.S., real (i.e., inflation-adjusted) mean incomes declined sharply within all six income groups during the Great Recession. From 2007 to 2010, the mean income of the bottom two quintiles and the top five percent each declined by approximately eight percent, while the incomes of the third (middle) and fourth quintiles and the “next 15 percent” declined by somewhat smaller margins. Real mean income losses within the top five percent from 2007 to 2010 were probably driven in large part by declining capital gains realizations resulting from a faltering stock market.

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The real mean income of the top five percent began its recovery one to two years before that of other income groups. Real mean income of the top five percent has increased each year since 2010, increasing by nearly twelve percent from 2010 to 2015. In short, the income recovery of the top five percent starter sooner and proceeded more rapidly than that of all other income groups. By 2015, real mean income of the top five percent exceeded the 2007 level by 2.4 percent. The only other income group which surpassed its 2007 level was the next 15 percent, which had a 2015 mean income that was 0.9 percent greater than what it was in 2007.

While the lower income quintiles shared in the sharp income decline experienced by the top five percent during the period from 2007 to 2010, they did not participate to the same extent in the subsequent recovery. In 2015, the real mean income of the bottom four quintiles were still below the 2007 levels. The lower the income level, the greater the net decline in income from 2007 to 2015. The greatest income decline over this period was experienced by the lowest income quintile (8.3 percent). Even if the robust income growth experienced from 2014 to 2015 continues into future years, the real mean income of the U.S. bottom quintile will not surpass the 2007 level until approximately 2018.

The trend among Minnesota income groups diverged from the national pattern in some important ways. The decline in real mean income among Minnesota’s top five percent did not begin until 2009. In fact, from 2007 to 2008, the mean income of the top five percent in Minnesota increased by 5.3 percent. No explanation for this one year spike is readily apparent, other than to note that the growth in top five percent income from 2007 to 2008 exceeds the margin of error in these estimates and thus this one-year growth (or at least some portion of it) is real and not the result of sampling error. The sharp growth in top five percent mean income from 2007 to 2008 was followed by an even sharper decline from 2008 to 2009, as top five percent real mean income dipped below the 2007 level. Minnesota’s top five percent experienced one more year of income decline in 2010. As was the case nationally, the mean income of Minnesota’s top five percent increased each year since 2010.

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Income trends in Minnesota during and after the Great Recession resemble the national trends insofar as the greatest income decline was experienced among the lowest income groups and the greatest growth was experienced among the highest income groups. However, for each of the six income groups, the decline in income from 2007 to the nadir of the Great Recession was less in Minnesota than nationally and the subsequent growth in Minnesota was greater. During the period from 2007 to 2015, each of Minnesota’s six income groups outperformed the corresponding national group. For example, over this period, mean real income of the top five percent increased by 5.8 percent in Minnesota, compared to only 2.4 percent nationally; meanwhile, mean real income of the bottom quintile decline by 3.6 percent in Minnesota, compared to 8.3 nationally.

Minnesota’s strong income performance relative to the national average during the Great Recession and in its aftermath is noteworthy insofar as the mean income of five of the six Minnesota income groups was already above the corresponding national means in 2007. In the one income group in which the 2007 Minnesota mean was below the national mean—the top five percent—the gap between the Minnesota mean and the national mean was substantially reduced during the period from 2007 to 2015.

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Minnesota’s superior performance relative to the national average during and after the Great Recession flies in the face of conservative claims that Minnesota’s economy is faltering. This conservative critique was systematically addressed in an August 15 North Star article.

While recent strong income growth and Minnesota’s strong income performance relative to the rest of the nation since 2007 is good news, there are other less encouraging trends embodied in the new Census Bureau data. For example, the greater income growth among higher income groups is a clear indication that income inequality has increased during and after the Great Recession. This trend will be examined in the next installment in this series.