You’ve heard the old adage, “the rich get richer and the poor get poorer.” Some observers say that adage is still reality today. Some say the statistics show the rich taking a larger and larger share of our total income.
Here’s some of the numbers used to support this claim. Over the past 30 years, the share of the total income pie in the country earned by the richest 20 percent of households increased from 43 percent to 50 percent. During the same period, the share earned by the poorest 20 percent of households dropped from 4.5 percent to 3.5 percent.
So the slice of the pie going to the richest households increased, while the slice cut for the poorest households decreased.
But does this automatically mean the rich have gotten richer and the poorer have become poorer? The answer would be “yes” if the income pie didn’t change in size. But the answer is not necessarily “yes” if the income pie has changed — in particular, if the income pie has gotten larger.
Indeed, the total income pie has gotten larger over the years. And what this has meant is, that although the poor’s slice of the income pie has shrunk, because the pie has grown much larger, the poor’s piece of pie is larger today than in years past.
Specifically, the average income of the poorest households, even after adjusting for inflation, increased 30 percent in the past three decades. Yet this was smaller than the 76 percent increase in the inflation-adjusted average of the richest households.
Thus, both the rich and the poor have gotten richer, but the rich have gotten richer faster. This means the gap between the rich and poor has widened. This trend is seen for the nation as well as for the majority of states, including North Carolina. In North Carolina, the incomes of both the rich and the poor have increased in the past 20 years, but the increase for the rich has been eight times faster.
What’s at the bottom of the faster income gains for the rich? In a word — education. One of the biggest determinants of income is education. Workers with more education earn more.
But with the “tech revolution” of recent decades, the value of education, skills, and knowledge has become even greater. This means the bump-up in income from education has gotten bigger. Since the richest income group contains the greatest proportion of highly educated workers, the increasing value of education has accelerated income gains for the rich.
There’s another factor at work here too in the comparison of income trends of the rich and poor. The statistics are really rigged to show the rich gaining faster than the poor. How so? It’s because the top category of income earners — typically labeled the “rich” — has no income ceiling when households are split into income ranges.
In analyzing household income trends, economists and others typically divide households into five categories according to income — the richest fifth, the next-richest fifth, the middle-income fifth, the next fifth of households in terms of households, and the poorest fifth of households. In comparing the “rich” and the “poor,” the top fifth is compared to the bottom fifth.
But when household income is generally rising, as it has in recent decades, income in the top 20 percent of households will automatically grow faster than income in the other categories because there’s no upper bound to limit the growth. So statisticians are virtually guaranteed to find incomes of the “rich” grow more!
So the old adage has to be revised. The modern version is, “both the rich and the poor have gotten richer, but the rich have gotten richer faster.” The biggest driver of this result is the economy’s increasing reliance on highly educated and knowledgeable workers.
This is most evident in looking at wage trends for college-educated workers versus high school-dropout workers. In the last 20 years, inflation-adjusted wages of college-educated workers have risen, while those for high school dropouts have fallen.
This is the reality of today’s economic world. For decades, both policy-makers and parents have encouraged the acquisition of more education in order to “get ahead” in today’s world. We now know what they meant.