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Americans on Wrong Side of Income Gap Run Out of Means to Cope

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Rising income inequality is starting to hit home for many American households as they run short of places to reach for a few extra bucks.

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

The result has been a downsizing of expectations. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. The lack of faith is especially pronounced among those making less than $50,000 a year, with close to three-quarters in the Dec. 6-9 survey saying the economy is unfair.

“I’ve had good jobs and bad jobs. But it always seemed like something would come along and keep me from getting ahead,” said Diana Kraft, 54, a homemaker in Denton, Texas.

Unemployment Benefits

Adding to challenges for lower-income individuals is the loss of unemployment benefits, which were supporting 1.3 million long-term jobless people in the U.S. before their expiration Dec. 28. While Congress failed to pass a renewal before adjourning earlier this month, Democratic lawmakers will press in early 2014 for an extension of the benefits, the Senate’s second-ranking Democrat,Dick Durbin of Illinois, told reporters Dec. 17.

The diminished expectations have implications for the economy. Workers are clinging to their jobs as prospects fade for higher-paying employment. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer rather than venturing out on their own.

In the meantime, record-high stock prices are enriching wealthier Americans, exacerbating polarization and bringing income inequality to the political forefront. Even independent government agencies like the Securities and Exchange Commission and the Federal Reserve have been dragged into the debate.

‘Defining Challenge’

“The basic bargain at the heart of our economy has frayed,” Obama said in a Dec. 4 speech in Washington. “This is the defining challenge of our time: Making sure our economy works for every working American.”

Democratic lawmakers also intend to press next year for a higher minimum wage to tackle the yawning gap between rich and poor, Durbin said.

Republicans aren’t ceding the issue.

“The American dream is certainly more in doubt than in decades,” House Speaker John Boehner of Ohio said in response to Obama’s speech. “But after more than five years in office, the president has no one to blame but himself.”

Income inequality has been rising more or less steadily since the mid-1970s. The Gini coefficient, a broad-based measure of inequality, stood at a record high last year, according to Census Bureau data dating back 46 years.

Bear Market

The recession actually interrupted the trend and temporarily narrowed the gap between rich and poor. Wealthy Americans were hurt by the bear market in stocks as the Standard & Poor’s 500 Index fell more than 50 percent, while the poor benefited from increased payments from the Medicaid health program and other government programs.

The disparity has widened since the recovery began in mid-2009. The richest 10 percent of Americans earned a larger share of income last year than at any time since 1917, according toEmmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

Economists have posited a variety of explanations for the growing differences in incomes. Manufacturing companies moved once high-paying jobs abroad, to China and elsewhere. Technological advances led to the loss of clerical and office work, especially relating to routine tasks. The decline of unions — 11.3 percent of workers were represented in 2012 compared with 20.1 percent in 1983 — has advantaged bosses at the expense of their employees.

Middle Collapsed

“The middle has really collapsed,” said Lawrence Katz, an economics professor at Harvard University in Cambridge, Massachusetts, and a former chief economist at the Labor Department in Washington.

Even those with college degrees are having trouble keeping up, he said. While they earn more than those with less schooling, they’ve seen no real wage growth in recent years. The median income of men 25 years of age and older with a bachelor’s degree was $56,656 last year, 10 percent less than in 2007 after taking account of inflation, according to Census data.

“It’s very difficult for anyone middle-income and lower,” said Ryan Sekac, 26, a mechanical engineer in Westerly, Rhode Island. “There was a time when it was easier.”

Highest Skills

It’s the richest of the rich who are reaping the most benefit as an increasingly interconnected and technologically sophisticated world puts a premium on those perceived to have the highest skills — a phenomenon dubbed “winner take all” by Cornell University Professor Robert Frank.

Government policies also play a role. The Treasury Department, for instance, taxes capital gains racked up by the wealthy on the sale of shares, bonds and other assets at about half the rate of ordinary income. The top 1 percent captured 95 percent of the gains in incomes in the first three years of the recovery, based on analysis of tax returns by Saez.

Those less well-off, meanwhile, are running out of ways to cope. The percentage of working-agewomen who are in the labor force steadily climbed from a post-World War II low of 32 percent to a peak of 60.3 percent in April 2000, fueling a jump in dual-income households and helping Americans deal with slow wage growth for a while. Since the recession ended, the workforce participation rate for women has been in decline, echoing a longer-running trend among men. November data showed 57 percent of women in the labor force and 69.4 percent of men.

Jobless Women

Women who became unemployed during the recession and its aftermath have been slower to find new positions. Among women losing jobs they’d held for at least three years between January 2009 and the end of 2011, 50 percent were re-employed by the start of 2012, while the share for men was 61 percent, according to a Bureau of Labor Statistics report released in February.

Households turned to stepped-up borrowing to help make ends meet, until that avenue was shut off by the collapse of house prices. About 10.8 million homeowners still owed more money on their mortgages than their properties were worth in the third quarter, according to Seattle-based Zillow Inc.

The fallout has made many Americans less inclined to take risks. The quits rate — the proportion of Americans in the workforce who voluntarily left their jobs — stood at 1.7 percent in October. While that’s up from 1.5 percent a year earlier, it’s below the 2.2 percent average for 2006, the year house prices started falling, government data show.

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