Transcript

Jessie Romero: I'm Jessie Romero, director of publications for the Research Department at the Federal Reserve Bank of Richmond. Thanks for listening to Speaking of the Economy, which you can subscribe to in Apple Podcasts.

We have a great line-up of episodes planned for this summer on topics ranging from deficit spending to wage inflation to the future of work. We'll also be sharing the stories of rural communities throughout our district that have embraced innovative redevelopment projects.

We're taking a brief hiatus this week to get this new content ready for you. In the meantime, we hope you'll enjoy this presentation by Laura Ulrich, the Richmond Fed's regional economist based in Charlotte. She spoke about wage, income and wealth inequality, issues that were brought into high relief during the COVID-19 pandemic. Her talk was recorded at the Traveler's Aid International Conference in June 2019.

Thanks again for listening and we'll see you soon with new episodes in July.

Laura Ullrich: We're going to start with wage inequality.

This is one of the graphs that I used to like to show my students a lot when I was a professor. This shows wages and productivity. If you look on the far left, this is wages and productivity in 1950. The blue line is hourly compensation and the red line is net productivity.

Until about the mid-70s, if productivity went up — productivity is basically how much a worker can make in an hour — if productivity went up, we saw wages go up as well. But then in the mid-1970s, we saw these start to diverge, and they diverged quite a bit at that time.

The question then may be, "What happened? What happened to cause this gap?" There's a couple of things that happened. One of the important things is actually tax policy.

Anybody know in 2019, what the highest marginal tax rate is? [Audience offered answers] So it changed, in all fairness, with the new law. It was 37 percent. If you're in the top tax bracket and you make $1, you got to give 37 cents to the federal government. Now, that doesn't count what you have to give to the state government or pay in sales taxes, things like that. But, in terms of federal income taxes if you make an extra dollar, you have to pay 37 cents to the government. Does anybody know what that rate was in 1963? [Audience offered answers] It was 91 percent.

Think about for a minute how that changes CEO behavior, for example. From a CEO's perspective, today, I've got an extra dollar. If I pay it to myself, from the federal standpoint I'm going to get to keep 63 cents, right? In 1963, I would keep nine cents. That changes what you do with the dollar.

Sometimes you'll see this statistic on CEO pay and how that gap has changed over time. CEOs are paid quite a lot more in terms of a multiple of their average employee than they were at that time. In my opinion, that is a big part of what changed behaviors. I'm not saying that the highest marginal tax rate should be 91 percent, by the way. I'm not saying that. But I do think it changed behavior a lot.

The other thing that changed was, maybe, just an [expectation] that this inequality exists. We don't expect productivity to keep up or wages to keep up with productivity anymore, so just that kind of general expectation can exacerbate the problem.

This [graph] shows the gap in wages. The red line is the top 0.1 percent of income earners, so this is the 99.9 percentile. The blue is the top 1 percent and the green, which you can barely see, is the bottom 90 percent. The gap narrowed during the recession between 2007 and 2009. That green line, you'll notice it kind of remains the same. Their wages aren't going to change that much during recession or during an expansion. But you can see the red line shrunk quite a bit during a recession, because it tends to hit people with higher incomes in terms of wages in a way that does narrow that gap during a recession. But you can also see that we've almost built back up to where we were before. So we're almost back to the pre-recessionary wage gap that we saw in 2007.

So wages, there is definitely inequality. But we don't typically think of wage inequality creating the sort of economic issues that we'll talk about with income and wealth inequality. However I will say, and I'll come back to this later, you have to make a decent wage to earn a decent income [and] to accumulate wealth, so it is a step in that process.

Laura Ullrich: Let's look at the data on income inequality.

The first thing here is the Gini coefficient, which is a rather complicated mathematical concept that measures inequality. But just to simplify it quickly, a perfect income equality would be a Gini coefficient of 0. So, if you had a 0 Gini coefficient that would mean everybody had the exact same income. Perfect inequality would be a Gini Coefficient of 1. So the closer you are to 1, the more unequal your incomes are.

In the United States, this [graph] breaks it down from 1970 to 2016, which is the most recent data we have on this. It breaks it down by race. And what you'll see is, overall and in every racial category, incomes have become less equal over this time period. The inequality in the United States is getting worse.

This [graph] shows the amount of income taken in by the bottom 90 percent, the top 10 percent, the top 5 percent, top 1 percent, and top 0.1 percent in the United States each year. This is income, average income. The richest 0.1 percent have 188 times as much income as the bottom 90 percent, in total. The top 1 percent make 39 times more income than the bottom 90 percent, the top 10 percent now average income more than nine times as much as the bottom 90 percent.

Laura Ullrich: Let's look at wealth inequality.

These two graphs show you the difference in income inequality and wealth inequality. This is before-tax income in 2016. The top 1 percent make 24 percent of the income, but in terms of wealth they have 39 percent of the wealth. The next 9 percent had 39 percent of the wealth. So, if you add those together, 78 percent of the wealth was held by the top 10 percent.

And then, the bottom 90 percent, in terms of income, they're making 50 percent. But in terms of wealth, they only have 23 percent. Much of this is because wealth is accumulated income over time, plus the fact that there is growth in the value of those assets. If you're living paycheck to paycheck, even a family of four making $52,000 a year, they're barely considered middle income. They're not going to be saving a lot of money, they're not going to be accumulating a lot of the wealth. So the people who are able to accumulate this wealth tend to be in the top percent of income earners.

Laura Ullrich: There are a lot of reasons for these gaps. I really have time to talk about three of those today. The first is going to be regional patterns, so geography. The last two are going to be ones that you've heard a lot about in the past. One is race gaps, which will follow very closely with what Bob talked about this morning, and then also gender gaps, which also gets a lot of press and political attention.

There is brand new research that has come out from a graduate student at Harvard, [Robert] Manduka. He just published it this year, where he looked at the regional patterns of commuting zones.

In 1980, less than 12 percent of Americans lived in metro areas that had mean family income either less than 80 percent of the national average or greater than 120 percent. Eighty-eight percent of people in 1980 lived in a community where they were between the 80^th percentile and the 120^th percentile, which means on average people are kind of middle class. By 2013, [the former group] had grown to over 30 percent, so it nearly tripled over that period of time.

What [Manduka] found was that this regional divergence was actually driven by inequality. That was what he was testing: Was this just natural migration patterns? Is it weather? What is it? And what he found is it was primarily driven by inequality. He found that, if inequality had remained constant between 1980 and 2013, income sorting would have resulted in 77 percent less divergence than what was seen. Also, if no income sorting occurred — so that means people are not moving to other areas because of income inequality — the growth in income inequality alone would have resulted in 53 percent of the observed income divergence.

I think the most important conclusion he finds is that spatial inequality — when I say spatial I mean by geography — spatial inequality of any type can exacerbate itself. If you have, let's say, a geography that has significant inequality over time, it is likely that the inequality will continue to get worse and worse and worse. What Manduka is saying happens over time is that this sorting continues to occur. People who can leave are more likely to leave. Those are likely to be people that have above-median income.

This leads to all sorts of issues. People may have to move further away to get to areas of employment. If the area is right around a place like Charlotte, it can get very expensive [and] people have to start moving further and further out. They may have to move farther away from their family structure. Some of you in this room are probably like me and don't live near any family and know that that is harder, right? It's harder to live where you don't have that support system, on average.

Some communities are facing significantly declining populations, and some of these are even in states that are growing rapidly. I live in South Carolina. South Carolina is growing very rapidly. There are counties in South Carolina that are shrinking every single day. As they shrink, their tax base shrinks and so the services they're able to provide shrink.

That leads to the concept of brain drain. I hate that term. I think it just sounds awful, but it is a real thing. These places in South Carolina that are shrinking, when I go around and visit them I ask, "Where are your highest performing students going?" They say, "Out of here, they're leaving." And I'll say, "Do they come back?" Nope, not unless they have to. If you talk to your average college student and ask them where do they want to live after they graduate, they're going to list the cities where they think of as having really good employment opportunities.

That's also not necessarily great for those places everyone's moving to, right, because that also puts strains on them. The increased population density in other areas lead to issues such as longer commute times. I don't know if any of you in here are from Atlanta, but I'm from outside of Atlanta and I watched that commute time just steadily increase my whole life as more and more people moved down. It could also be increased crime, lack of affordable housing, environmental degradation, and increased pressure on services and amenities that cities have.

Laura Ullrich: The next [gaps] are race gaps. And you hear a lot about this. If you read popular press and listen to NPR, these are really sobering facts. This is from an article in 2017 and is based on 2016 data — for every $100 earned by white families, black families earn just $57.30. That's in income. But wealth is extremely different — for every $100 in white family wealth, black families own just $5.04.

That absolutely can be traced back to everything that Bob was talking about. I've never seen the Monopoly example, but that's a great example, right? You come into the game and everybody's bought up all the land and the hotels and the houses. It's not very fun to play the game. So that's actually a really good analogy, as these families try to build wealth.

According to the most recent Federal Reserve Survey of Consumer Finances from 2016, white families have a median $171,000 in net wealth and black families is $17,000. Interestingly, Hispanic families are higher at $21,000.

This next statistic is another statistic that I use a lot in my classroom because I teach a lot of these policies and issues surrounding income inequality: the Forbes 400 richest families. Some of these families are Hispanic, some of these families are black, okay, they're not all white families. But the 400 richest families in the United States own more wealth than all black households plus a quarter of Hispanic households. And with this wealth also comes a lot of power and influence, right? And also black families are 20 times more likely to have zero or negative net worth than they are to have over $1 million in assets.

There is no doubt that a very significant race gap exists. There is absolutely no doubt about it. What as an economist I find really concerning is that it is getting worse, it's getting worse.

There are some other statistics that would make you think that median net wealth should be increasing. But I have a few ideas of what may be causing that.

I think part of it are stagnated wages. We've looked at the fact that wages at the very top have increased, but if you go and look at Fortune 500 CEOs, right now you're not going to find many people of color or many women. It's mostly white males still. And so the incomes for people at the top have increased but not so much below that. I do also think tax policy becoming less progressive causes some of this as well.