Page last updated at 05:14 GMT, Thursday, 28 August 2008 06:14 UK

US household incomes fail to grow

By Steve Schifferes
Economics reporter, BBC News

Jobseekers at a jobs fair in California. File photo
Jobs did not grow strongly in the upturn, hurting real incomes.

US households have failed to benefit from the strong economic growth in the last six years of expansion.

Despite an economy that expanded by 18% since 2000, real income for the median family fell by 1.1% from 2000 to 2006.

Job creation was much slower as well, with jobs growing by just 0.6% per year, one-third of the previous rate.

But people at the top of the income distribution, the top 1%, tripled their income between 1989 and 2006, according to the Economic Policy Institute.

"While most Americans were struggling, the good times were rolling for the top 10%," said EPI president Lawrence Michel.

With the US economy now slowing, household income is likely to fall further behind, the group predicts, with African-American and Hispanic households especially hard-hit.

Income boost

The US Census, however, in a report released on Tuesday, said that real incomes had increased by 1.3% between 2006 and 2007, while poverty and inequality had stabilised or declined.

US baby - file photo
More children were covered by health insurance as government schemes grew

The Census also said that the number of people not covered by health insurance decreased from 47 million (15.8%) to 45.7 million (15.3%) - although it was an increase in government health insurance coverage of children that was responsible for most of that change.

But the new figures do not change the basic thrust of the EPI report, according to the organisation's chief economist and Obama advisor -Jared Bernstein.

He argues that the recent changes in the tax system have exacerbated the trends in pre-tax inequality of income, something the Obama campaign has pledged to reverse.

"When income concentration creates barriers to the resources and opportunities that would enable people to get ahead on their own initiative and efforts, that violates our fundamental sense of fairness," he says.

Jobless recovery

Mr Bernstein points to the weakness of job growth during the economic recovery that began in 2001.

A worker puts the finishing touches on GM's Cadillac CTS
Black and ethnic minority workers have had slower income growth

It took four years to regain the jobs lost in the 2001 recession, while the unemployment rate actually increased from 4% in 2000 to 4.6% in 2006 (it is now 5.5% and rising fast).

However, productivity in the economy grew more quickly, as firms shed jobs despite the economic boom.

As a result, the EPI calculates that 90% of the growth in the economy between 1989 and 2006 went to the top 10%.

The inequality of US incomes is such that the top 10% of households receive 40% of all household income, while the bottom 90% receive the remaining 60%.

The big disparities in income, coupled with the rising cost of higher education, have hurt the chances of poorer Americans improving their job and income prospects by completing a college education.

For example, in 2005 only 30% of low income students with high test scores were able to finish college, as compared to 74% of high income students with equivalent scores.

The study points out that social mobility in the US has been broadly unchanged for decades, with around 40% of Americans staying in the same income quintile they started in, with only one in five moving more than one income group up or down the scale.

Regional disparities

The US census data also points to big regional disparities in income and wealth across America.

Manhattan street scene - file image
There is a big gap between rich and poor areas in the US

The richest suburbs - around Washington, DC and New York City - have median household incomes of over $100,000 (54,600) per year, while the poorest counties in the rural South had median incomes of under $30,000.

Poverty is also concentrated in the South, with nearly 30% of children in poverty in Mississippi, compared to just 8.8% in New Hampshire.

Among big cities, the lowest median income was in Detroit, Michigan, with median household income of just $28,000.

Credit crunch problems

The credit crunch, which is pushing many poor owner-occupiers into mortgage arrears and foreclosure, could further reduce household income and wealth in Midwest cities like Detroit and Cleveland.

It may also increase poverty rates in high-cost areas like Southern California, where many sub-prime loans are concentrated.

On the other hand, the effects of the economic slowdown might actually reduce some measures of inequality by sharply reducing the value of shares and housing assets held by richer households.

But if unemployment begins to increase sharply, it is likely to hit the income of the poor, the less well educated, and black and Hispanic households hardest.

Budget dilemma

The figures could pose dilemmas for both Presidential candidates, who have been promising help for hard-pressed families hit by higher fuel costs, mortgage foreclosures, and lack of health care coverage.

The slowdown is also likely to increase the size of the US budget deficit, while making it more expensive to fund measures to take people out of poverty and provide universal health care.

The Census Bureau has new figures which show the dramatic effects of government policy on poverty. It calculates that food stamps have lifted 1.8m people out of poverty, while earned income tax credits have helped 1.7m.

However, it is the more generously funded US social security system, the government pension scheme, that has the most dramatic effect on poverty. Without it, the number of elderly people in poverty would quadruple to 16m, effectively increasing the poverty rate by 50%.

The future funding of the social security system is one of the key issues in the policy debate between the two candidates.

The average median household income in the US in 2007 was $50,233. Those in the top 10% earned $136,000 or more, while the bottom 10% had a median income of $12,200. The national poverty line for a family of 2 adults and 2 children was $21, 027, and 37.3m people lived in poverty on that definition.

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