States where the middle class is shrinking fastest

<a href="http://bit.ly/1a5CAfj" target="_blank">Thomas C. Frohlich</a> and <a href="http://bit.ly/1AVZvXm" target="_blank">Alexander Kent</a>
&amp;nbsp;
 

The American economy is by many measures well on the road to full recovery. The national unemployment rate was 6.2% in 2013, down from 9.3% in 2009; U.S. gross domestic product grew 5% in the third quarter of 2014; and the S&P 500 recently reached its all time high.

And yet the middle class, which historically was the driver of economic growth, is falling behind. The average income among middle-class families shrank by 4.3% between 2009 and 2013, while incomes among the wealthiest 20% of American households grew by 0.4%.

Based on average pre-tax income earned by the third quintile, or the middle 20% of earners in each state, middle-class incomes in California declined the most in the country. Incomes among middle-class Californian households fell by nearly 7% between 2009 and 2013, while income among the state’s fifth quintile, or the top 20% of state earners, grew by 1.3%.

Below, Yahoo Homes is publishing the five states where the middle class is shrinking fastest. To see the rest of the top 10, visit 247WallSt.com:

&amp;nbsp;
 

According to Joe Valenti, director of asset building at the Center for American Progress, the American middle class is essential for economic growth because middle income families are spending relatively large shares of their incomes on goods and services. “An additional dollar in the hands of a middle income earner is going to drive a lot more spending than an additional dollar in the hands of someone in that top quintile,” Valenti said. While households in the top quintile are able to spend enormous sums of money, “at some point there’s only so much that an individual can spend, even on all different kinds of luxury goods.”

While the middle class is the most important cohort in terms of spending and has in the past been essential for economic growth, middle income families have been the victims of wage stagnation. Valenti argued that as early as the 1970s, American companies started becoming much more productive. However, because of “a decoupling of productivity and wages,” wages among many workers have remained stagnant, and many in the middle class “have not been able to reap the benefits of higher productivity,” Valenti explained. Instead, returns from higher productivity have gone to owners and investors and not to the workers, he said. Many of the beneficiaries of these returns are likely part of the wealthiest 20% of households, whose incomes have grown in recent years.

In all of the states on this list, the share of total income earned by the bottom 80% of households fell between 2009 and 2013, while it rose for the highest quintile. The top 20% of U.S. households held more than 51% of total income in 2013, up 1.14 percentage points from 2009. Even among top earners, income was not evenly distributed. Over that five-year period, the top 5% of households accounted for nearly 75% of income gains in the top 20% of earners.

Much of the income growth among the highest-earning households is likely due to stock market gains. As Thomas Piketty argues in his book, “Capital in the 21st Century,” income inequality results from a higher return on capital — money used to make more money in the stock market or other revenue-generating assets — than wage and GDP growth. With the rich holding a disproportionate share of money in the stock market, their incomes have recovered much faster than those of middle-class workers.

Valenti concurred. “We have seen the stock market recover quite well for many Americans who do have access to the market and who are investors." Meanwhile, average workers do not.

According to data collected by Piketty, the average capital gain income of households in the bottom 90% was $558 in 2012. The average capital gains of the top 10% of households was nearly $30,000. And the comparable figure for the top 1% of U.S. households was a whopping $242,000 in 2012.

Several other factors, such as union membership rates and a particular state’s tax climate, such as no income tax or higher sales taxes, can also affect the redistribution of wealth across the nation. “Traditionally, union organizing has stepped in when policy makers have been unwilling to,” Valenti said. For example, depending on the union’s size and its sway, “policy makers may not feel the same pressure to pass or increase a minimum wage” if unions can negotiate a wage increase on their own.

While union organizing was a major component of the middle class’ formation in America after World War II, the level of labor force participation in unions fell from 12.4% in 2009 to 11.3% in 2013. In some states the decline was even more pronounced. Oregon’s union membership, for example, fell by 3.3%, the second largest decrease nationwide.

To determine the states where the middle class is suffering the most, 24/7 Wall St. used data on the average pre-tax income earned by each income quintile from the U.S. Census Bureau. We defined middle class as the third quintile, or the middle 20% of earners. We examined the growth in average incomes in the third and fifth quintiles between 2009 and 2013 to identify income trends in the middle and upper class. The final list was composed of states where middle-class incomes fell by more than 4.3% and fifth quintile incomes rose by more than 0.4%, the national average. Both benchmark figures reflect the national change of their respective quintiles. Because Census income data reflect pre-tax levels, they may overstate the degree of income inequality in the poorer quintiles. However, it is unlikely that the tax burden of the third quintile is significant enough to skew the data.

We also looked at data on the share of aggregate income by quintile from the Census Bureau, and how that share changed between 2009 and 2013. Also from the Census Bureau, we reviewed poverty rates, the share of households making less than $10,000 a year, as well as the share of households making more than $200,000 a year. All data are from 2009 to 2013. Additionally, we considered the Gini coefficient. The Gini coefficient indicates the degree to which an area’s incomes deviate from a perfectly equal income distribution. Scaled between 0 and 1, a coefficient of 0 represents perfectly equal incomes among all people. From the Bureau of Labor Statistics, we looked at annual unemployment rates from 2009 and 2013. The percentage of non-agricultural employees who identify as members of a union came from Unionstats.org. Tax data come from the Tax Foundation’s 2014 State Business Tax Climate Index.

These are the states where the middle class is dying:

Olympic National Park, Washington.
Olympic National Park, Washington.

5. WASHINGTON
Middle-income growth, 2009-2013: -5.0%
Top quintile income growth, 2009-2013: 1.3%
Top quintile share of income: 49.2%
Middle-class household income: $58,752 (13th highest)

The average income among middle-class households in Washington fell faster than in most states between 2009 and 2013. Incomes among the wealthiest 20% of households in the state, however, grew faster than comparable figures across the nation. In an interview with 24/7 Wall St., Joe Valenti, an analyst with the Center for American Progress, argued that Washington’s tax climate may present an additional burden to those suffering from income stagnation. Without an an income tax, the state relies more heavily on its sales tax to generate revenue, for example. A higher sales tax will often disproportionately affect lower-income residents who not only tend to consume more as a percentage of their income, but also may have less opportunities to drive across state lines to take advantage of a lower tax rate. Nearly 20% of Washington’s workforce was part of a union in 2013, one of the highest rates. Yet, this did not appear to have an effect on the distribution of income in Washington.

Providence, Rhode Island.
Providence, Rhode Island.

4. RHODE ISLAND
Middle-income growth, 2009-2013: -5.6%
Top quintile income growth, 2009-2013: 2.5%
Top quintile share of income: 50.7%
Middle-class household income: $56,432 (17th highest) Middle-class households in Rhode Island earned $56,432 in 2013, roughly $4,000 more than the national average, but still 5.6% less than they earned in 2009. Nationally, middle-class incomes fell by 4.3%. By contrast, incomes of the top 20% of households rose by 2.5% between 2009 and 2013, far greater than the 0.5% growth among the top quintile nationwide. Like in many of the states on this list, income gains among the top 20% of households were disproportionately concentrated in the hands of the top 5%. In fact, the top 5% of households in Rhode Island received more than 96% of the income gains made by the top 20% of households between 2009 and 2013. Nationally, the top 5% only captured 74% of gains in the upper quintile over the same period.

Portland Head Light, Maine.
Portland Head Light, Maine.

3. MAINE
Middle-income growth, 2009-2013: -5.8%
Top quintile income growth, 2009-2013: 2.2%
Top quintile share of income: 49.0%
Middle-class household income: $47,018 (14th lowest) Like in several other states where the middle class is falling behind, income in Maine is relatively well distributed. However, the income gap in Maine is widening faster than in the nation as a whole. Average incomes among the wealthiest 20% of households in the state grew by 2.2% between 2009 and 2013, one of the faster growth rates and much faster than the comparable national figure of just 0.4%. Incomes among households in the third quintile, on the other hand, declined by 5.8% over that time. While more income is shifting faster to the state’s wealthiest residents, both Maine’s unemployment rate and its poverty rate were better than the respective national rates.

Fall colors, Stowe, Vermont.
Fall colors, Stowe, Vermont.

2. VERMONT
Middle-income growth, 2009-2013: -5.9%
Top quintile income growth, 2009-2013: 2.8%
Top quintile share of income: 48.8%
Middle-class household income: $53,020 (20th highest) Incomes among the wealthiest 20% of Vermont households grew by nearly 3% between 2009 and 2013, the sixth largest increase nationwide. Over the same period, incomes among middle-class households fell by 5.9%, one of the larger declines. As in most of the nation, income in Vermont is becoming even more concentrated among the wealthiest 5% of households. These households accounted for 21.1% of all income in Vermont in 2013, up considerably from 2009. The state’s wealthiest 5% of households also accounted for the vast majority — nearly 90% — of income gains among the wealthiest 20% of households between 2009 and 2013. Despite the worsening income gap, Vermont had an exceptionally low unemployment rate, at just 4.4% in 2013, versus the national rate of 7.4%.

Venice Beach, Los Angeles.
Venice Beach, Los Angeles.

1. CALIFORNIA
Middle-income growth, 2009-2013: -6.9%
Top quintile income growth, 2009-2013: 1.3%
Top quintile share of income: 52.2%
Middle-class household income: $60,143 (10th highest) California’s middle-class household income shrank by 6.9% between 2009 and 2013 to $60,143, while incomes of the top 20% of households rose by 1.3% to $223,841 over that time. By 2013, the fifth quintile accounted for more than 52% of the state’s aggregate income, the third highest share in the country. Perhaps as a result, the state’s Gini coefficient increased by the second highest margin in the country, reflecting worsening income inequality. At 7.5%, California has the highest sales tax rate in the nation, which may further aggravate the purchasing power of middle- and low-income households. By definition, sales taxes are regressive — they disproportionately fall on the poor — because richer households tend to spend a smaller share of their income on consumption.

To see the remaining 10 states where the middle class is dying, visit 247WallSt.com.