The growing income gap between the top one percent and the less well-off has been documented many times, most recently in two North Star articles. The first of these articles used data from Minnesota Tax Incidence Studies (MTIS) spanning the last quarter century to demonstrate the increased concentration at the top of Minnesota’s income spectrum, while the second showed the growing gap between the top one percent and middle-income households, defined as the twenty percent of households in the middle of Minnesota’s income distribution (i.e., the middle quintile).
Further analysis shows that—after adjusting for inflation—the average income of these middle-income households changed little from 1988 to 2012, while the average income of the top one-percent surged by over 50 percent. These findings are based on MTIS data covering the period from 1988 to 2012, adjusted for inflation using the Consumer Price Index (CPI). (Projected MTIS data for 2017 are excluded from this analysis because the CPI for 2017 from the Bureau of Labor Statistics is not yet available.)
Before taking into account the impact of inflation, income growth of both middle-income and high-income households appears robust. In nominal dollars (i.e., dollars unadjusted for inflation), the average household income of the middle quintile grew from $20,367 in 1988 to $44,023 in 2012, an increase of $23,656 or 116 percent. Meanwhile, the average household income of the top one percent grew from $379,579 to $1,314,123, an increase of $934,544 or 246 percent. Percentage growth in nominal income for the top one percent was more than double that of the middle quintile over this 24 year span, while the dollar increase was nearly 40 times greater.
The contrast in income growth between the top one percent and the middle-quintile becomes even more stark after adjusting for inflation. The decline in the purchasing power of the dollar due to inflation has vastly eroded the nominal growth in middle quintile income since 1988. In constant 2012 dollars, the average household income of the middle quintile increased from $39,537 in 1988 to $44,023 in 2012, an increase of $4,486 or 11 percent. This translates to an annual average growth rate of just 0.4 percent. Meanwhile, the real (i.e., inflation-adjusted) income of the top one percent grew by $577,269 or 78 percent.
The real growth in the average household income of the top one percent proceeded at an uneven pace from 1988 to 2012, interrupted by declines coinciding with economic recessions. (The cause of these declines was briefly discussed in part 1 of this series.) However, the long-term trend in real household income for these high-income households is clearly upward. Meanwhile, the trend in middle quintile income is relatively flat.
A review of selected statistics further underscores the disparity in income growth between the top one percent and the middle quintile from 1988 to 2012. In inflation-adjusted dollars, the average household income of the top one percent has grown seven times more rapidly than that of the middle quintile. In terms of real dollars per household, the income growth of the top one percent ($577,269 in constant 2012 dollars) is 129 times greater than that of the middle quintile ($4,486). In fact, just the growth in the average household income of the top one percent from 1988 to 2012 is thirteen times greater than the entire 2012 average household income of the middle quintile.
The earliest MTIS data is from 1988. Data from other sources suggests that the growth in income disparities between the top one percent and middle-income households began to swell approximately a decade prior to this.
To compound matters, the above analysis assumes that the same rate of inflation applies to all households, regardless of income. However, there is evidence that inflation impacts very high income households less heavily than lower-income consumers. One possible explanation for this trend is that as the income of extremely high income households has soared, manufacturers have directed greater effort toward satisfying this high-end market; as a result of this increased competition, growth in the price of high-end products has been held down. If this is correct, the disparity in inflation-adjusted income between the top one percent and middle-income households might be growing even more rapidly than is indicated above.
Recent research suggests that the focus on the top one percent is somewhat misplaced. According to this line of analysis, the real concentration of income is occurring among a tiny sliver of super-wealthy households at the very top of the top one percent. The final article in this series will examine income concentration among Minnesota’s über-rich and why the entire discussion of income inequality matters.