Income Inequality Continues to Escalate

Last summer, two separate North Star articles (published on July 18 and August 29) explored the growth in U.S. and Minnesota income inequality since the 1970s and 1980s. While recent data from the U.S. Census Bureau showed significant income growth in 2015, income inequality has continued to increase since the beginning of the Great Recession in 2007, as demonstrated in the preceding North Star article. The extent of the growth in income inequality in Minnesota and nationally can be precisely measured using a statistic known as the Gini coefficient.

Gini coefficients for Minnesota and the U.S. as a whole for each year from 2007 to 2015 are available from the U.S. Census Bureau’s American Community Survey (ACS). The value of the Gini coefficient ranges from zero to one. A value of one denotes a society of complete inequality in which all of the income accrues to a single household; conversely, a Gini coefficient of zero denotes complete equality, in which each household has identical income. The Gini coefficient for Minnesota and the entire U.S. has increased since 2007, denoting an increase in income inequality since the beginning of the Great Recession.

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As measured by the Gini coefficient, income inequality in Minnesota is less severe than it is nationally. However, income inequality both in Minnesota and nationally increased at a similar pace from 2007 to 2015, as measured by Gini coefficient growth. (Growth in the Gini coefficient in Minnesota is slightly less than nationally, although the difference in the growth rate between Minnesota and the U.S. could be due to sampling error.) Based on Gini coefficients for all fifty states from the ACS, Minnesota had the twelve lowest level of income inequality in the nation in 2007; by 2015, Minnesota’s rank had improved to the tenth lowest.

Despite the long-term growth in income inequality from 2007 to 2015, inequality in Minnesota as measured by the Gini coefficient declined from 2014 to 2015, although some portion of the observed reduction in Minnesota income inequality could be due to ACS sampling error. Nationally, income inequality increased from 2014 to 2015.

Some portion of the reduction in income inequality in Minnesota may have been the result of state minimum wage increases. Minnesota’s large employer minimum wage increased from $6.15 to $8.00 per hour on August 1, 2014 and to $9.00 per hour on August 1, 2015. (There was another increase on August 1, 2016, although this increase would have no impact on 2015 ACS data.) On the same dates, increases in Minnesota’s small employer minimum wage, youth minimum wage, and training minimum wage also occurred.

Using ACS data, it is not possible to determine to what extent the decline in Minnesota income inequality from 2014 to 2015 was a result of these minimum wage increases. However, it is worth noting that the largest percentage increase in Minnesota mean wages from 2014 to 2015 (4.9 percent) occurred among the lowest quintile—the population most likely to be positively affected by minimum wage increases. The next largest increase (3.3 percent) occurred among the second quintile. These trends are illustrated in a November 9 North Star article.

While increases to Minnesota’s Working Family Credit (WFC) enacted in 2014 helped to improve the economic condition of many low-income households in the state, the impact of the WFC is not reflected in the ACS definition of income and thus 2014 enhancements to the WFC would not affect the level of income inequality as measured by the ACS Gini coefficients.

Strong income growth from 2014 to 2015 was certainly something to celebrate—as was Minnesota’s superior income performance relative to the national average among all six income groups during the period from 2007 to 2015. However, while real mean incomes among high income groups have surpassed pre-Great Recession levels, mean incomes among lower income groups are still below pre-recession levels, both nationally and in Minnesota. Given the economic drag that income inequality creates on the economy, reversing the tide of rising income inequality should be a priority.