Tuesday, February 25, 2014

Income Inequality in WV

A recent news blip on WV Public Broadcasting relays a report that income inequality in West Virginia has grown over the last three decades. Specifically, it focuses on the difference between the top 1% of earners in the state and the rest of the state's earners. It has become popular since the Occupy Wall Street movement to discuss the 1% of top earners and the rest of the public. But what does the broader breakdown of different income brackets look like? How has it changed over time? And what does this mean from a public policy outlook?
The article sights a research paper released from the Economic Policy Institute (EPI). That is a rather bland name that most people will gloss over. The EPI states on its website that it "conducts original research according to rigorous standards of objectivity and, as a result, is a reliable source of information and analysis." But on the same page it mentions this: "EPI proposes policies that protect and improve the economic conditions of low-and middle-income workers and assesses policies with respect to how they affect those workers." The organization states it is releasing objective economic analysis, but then states it has a mission of promoting certain public policies. Having a policy agenda implies having a bias; this makes an organization less than completely objective. Also, note this from their website, "In 2010 through 2012, a majority of our funding (about 60%) was in the form of foundation grants, while another 26% came from labor unions." So this organization will be inherently biased towards policies advocated by the foundations funding it as well as labor unions.
Still, its claim that income inequality is growing in West Virginia deserves to be inspected. The statistic stated in the article is that the top 1% of incomes in West Virginia are, on average, 20 times greater than the average income of everyone else. This alone is not shocking. The smaller the percentile of highest earners, the bigger the multiple. So average incomes from the wealthiest 1% will always be higher than average incomes from the wealthiest 2%. For example, in 2011 the top 0.1% of earners in WV had an average income 67 times that of the average income of all other WV earners. That's basic mathematics.
Another statistic in the article says that WV is one of the states where the top 1% of earners took between 50% and 84% of the income growth from 1979 to 2007. This statistic does seem to imply that the top 1% of earners are capturing all the economic growth in the state. But there are problems with making this basic interpretation. One is that the people who were in lower income brackets in 1979 were not the same people in those same income brackets in 2007. Someone earning $30,000 in 1979 could reasonably be earning $70,000 in 2007. Another person earning $250,000 in 1979 might be earning over $1 million by 2007. Other people may have moved out of the state or passed away since 1979. This is an important distinction. People outside the 1% can move into or out of that bracket over time. An income bracket is not the same people gaining and losing a share of economic growth over time.
Reviewing real data from the IRS is helpful to make these points more salient. Consider the period 1997 to 2011. There were about 61,000 fewer taxable income forms reported in 2011 than in 1997; this signifies outward migration from WV. But more important for discussions of income inequality are the movements between income brackets. In 1997 80% of the tax forms were for individuals earning $50,000 or less, but by 2011 that number dropped to 56%. Meanwhile, the share of individuals in each income bracket above $50,000 increased from 1997 to 2011. For example, in 2011 41% of earners took home between $50,000 and $200,000. Back in 1997 only 19% of workers were in that income bracket. Therefore, the recent evidence suggests that there is income mobility by WV income earners over time. If this is not the case, then lower income workers left the WV labor force and higher income workers entered it.

Having discovered that people are not stationary in income groups over time, one can move on to seeing how income has changed within the groups. Those West Virginians earning above $1 million in 1997 had an average taxable income of $1.93 million. Individuals in that bracket in 2011 earned $2.64 million on average. That is an increase of about 37%. Meanwhile, individuals earning below $50,000 moved from having an average taxable income of $18,000 in 1997 to $13,500 in 2011. This is a decrease of around 25%. And indeed there is a decrease of average incomes in each bracket except for those over $1 million. Other than the under $50,000 income bracket, those decreases were at or below 8%. That still seems like a bad thing.

Does it mean that income inequality is a rampant problem in the state? Recall that the people earning less than $50,000 in 2011 were not the same people earning less than $50,000 in 1997. Therefore, there are a host of reasons why the average income in this bracket might be lower. We know there are fewer people in this bracket over time. Maybe the type of workers in this bracket changed. The type of worker may have changed from employees working at a plant earning $45,000 a year to service workers earning closer to $25,000 per year. A shift in the nature of the workforce could produce such a change. Maybe there were younger workers in the 2011 $50k group who could not demand wages close to $50,000 whereas those in the 1997 group may have been tenured employees. These are two examples of why averages within income groups change over time. And at least the share of income in groups from $75,000 to $1 million increased over that period.

Hence, while we do see higher income among the highest earners in the state, this does not necessarily mean workers in the lower income brackets are worse off than they were two to three decades ago. For one thing, they are not the same people. A Carbide employee from 1980 is not the same person as a recent high school graduate working retail at the Town Center Mall. The high school graduate may not have a family and wouldn't mind earning $10,000 less if it meant having a smart phone, internet access, and a television.
The public broadcasting article goes on to state that this report was released while the WV senate is considering a minimum wage bill. In doing so it implies that the minimum wage has a direct connection to income inequality. But this is far from straightforward. The academic and public policy community is deeply divided over whether minimum wage reduces income inequality or not. It may seem intuitive that if you make a company pay its lowest income workers more, people in the bottom income bracket will earn more. However, employers can simply choose to not hire as many minimum wage workers, or they can fire those they currently employ. Changing what you require a company to pay a worker does not change the productive capacity of that person. In this way economists often predict that increases in the minimum wage will increase unemployment. A minimum wage law may raise the average income in the under $50k bracket, but that would be accomplished by pricing the lowest earners out of the labor market. An employer will simply avoid hiring a worker who does not produce above the level of income required by the government.
Income inequality in a society can be problematic. It can cause social strife and depressed workers and it implies stagnation in living standards. Those are serious problems. That makes understanding the statistics behind inequality very important. Fortunately for West Virginia, the picture is not as bleak as the study released from the EPI would lead you to believe. Unfortunately, the causal link between minimum wage policies and inequality is hazy at best. There is no simple fix to making relatively lower income earners in a society more productive and more valuable to employers. 

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