Breaking Down the Income Gap Into Real Terms

We help explain the stark divergence between the middle class and the rich.

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The term "income gap" has become a political catchphrase in recent years. It's used to sell Americans on the unavoidable reality that the richest workers in this country have seen their incomes continue to grow, while the middle class has seen income growth stagnate.

It's an especially useful term in an election season, just like the one we're entering, as it captures much of the frustration of U.S. workers over the past four years. Economic growth has been nonexistent, or tepid at best. Many consumers have been forced to make more with less.

[See 10 Trends in 2011 We Don't Want to See in 2012.]

It also captures resentment toward Wall Street and big business. As many Americans have struggled, banks received government bailouts, and many have returned to profitability. The middle class, meanwhile, continues to muddle through the downturn.

But what does the income gap mean in real terms? What has changed over the past three decades that has allowed this gap to grow? And what are the actual dollar amounts that separate the middle from the upper class?

The Great Compression. In the years following World War II, the income gap between the wealthy and the middle class shrunk considerably. The primary reason for this was the Great Depression, which decimated the fortunes of many of the country's rich.

Over the next three decades, the income gap remained relatively stable. The growing U.S. economy provided opportunities for middle-class families to live comfortable lives. At the same time, the country's wealthy saw their incomes grow at a rate similar to those in the middle class. The rich were making more, but their income growth was in line with that of the middle class.

By the 1980s, however, the income growth rate for the wealthy and the middle class began to diverge. Conservative economic policies, as well as changes to the tax code that favored wealthy Americans, caused an uptick in income growth for the rich. At the same time, many of the manufacturing industries that were the backbone of middle-class growth began to shrink. Once-reliable sources of income became not so reliable.

[See 7 Stressors Sapping the Middle Class.]

The Great Divide. The divergence between the middle class and the rich has been stark, and it's most easily explained using a series of different metrics.

According to a recent Stanford University study, 44 percent of U.S. families lived in a middle-income neighborhood in 2007. In 1970, 65 percent of Americans lived in these neighborhoods. And while just 15 percent of families lived in affluent neighborhoods in 1970, 33 percent of Americans now reside in rich areas. Areas of poverty have grown significantly as well.

In other words, middle-class areas are shrinking, while poor and rich areas are growing.

But to best appreciate the income gap, it's helpful to look at actual changes in wages over the past 30 years. The Congressional Budget Office recently found that the income of the top 1 percent of earning households grew 275 percent from 1979 to 2007. At the same time, the income of other American households grew just 62 percent.

According to Census Bureau data, since 1980, some 5 percent of income has migrated from the middle class to the affluent. According to Bloomberg, this means that the 5,934 richest households in America saw an increase of $650 billion in income, or about $109 million per home.

Census data also indicate that the number of Americans living in poverty is growing. According to a report in the International Business Times, 6.3 percent of Americans live below the poverty line, or with an income of about $11,000 for a family of four, the highest level in the 36 years this statistic was tracked.

[See How to Gauge Your Middle-Class Status.]

Impact beyond the pocketbook. The income gap doesn't just impact those middle-class families whose income growth has stagnated. It also impacts the ability of the U.S. economy to get back on track.

Without increases in income, middle-class families have less to spend and attempt to save more. Without spending, growth is almost impossible. So until the middle class has more money to invest back into the economy, growth will be difficult.


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