State Income Gap Widens as Inequality Levels Off Elsewhere

The middle-income California family lost ground economically during the 1990s while those families in other states progressed, according to a new study.

The report, released by the Federal Reserve Bank of San Francisco on Monday, also expands on earlier studies showing a growing gap between the state’s wealthiest and poorest residents during the 1990s.

“In the rest of the U.S., the interesting thing about the 1990s was that income inequality leveled off. But in California, it continued to grow rapidly,” said Mary Daly, a senior economist with the Federal Reserve Bank and the principal author of the study.

Daly and other analysts largely blame the diminished economic standing of California’s mid- and lower-income families on the state’s devastating recession in the early 1990s and the late arrival of the national economic boom in the state.

The Fed study compares 1998 with 1989 data, and some economists said its findings are less relevant today because the state’s economic growth has gained steam in the last few years. Indeed, since California’s recovery took off in 1994, income gains are believed to be widespread across the state’s economic spectrum.

Thus, if California’s recovery continues after the national economy slows, as many analysts consider likely, the state’s showing compared with other states would improve.

The study, however, also points to a more long-term cause of economic inequality: California’s comparatively large pool of young and poorly educated workers, many of them immigrants.

All told, even though high-income California families continued to fare better than their counterparts elsewhere in 1998, the middle-income California family lagged behind, according to the study.

In 1998, the most recent year for which family income data are available, the median California family of four drew annual income of $49,336. That compared with $51,642 for the other 49 states, the report found.

After filtering out inflation, the study determined that median family income actually fell 4% in California from 1989 to 1998, while in the other 49 states it climbed 8%. The median level is the point at which half the state’s families had higher incomes and half had lower.

But among families at the top 30% of the income scale, California still outpaces the rest of the nation. In California, families in the top 30% of the income scale reported incomes that averaged $123,028, or $7,132 more than equivalent families in other states.

At the same time, the Federal Reserve Bank study found that 15.3% of Californians were below the poverty level in 1998, versus 12.3% for the other 49 states. In 1989, that gap was narrower, with 14% of Californians in poverty versus 13.3% elsewhere across the country.

To derive its findings, the study compared the status of California families in 1998 with their standing in three years when business cycles were at their economic peaks: 1969, 1979 and 1989. The raw figures were drawn from the U.S. Census Bureau’s so-called Current Population Survey, which polls more than 50,000 households across the country, including 5,000 in California.

During those economic peak years, the report found, Californians at all levels of the economic spectrum posted higher income levels than their counterparts in the 49 other states. Between 1969 and 1989, California’s edge over the rest of the nation in family income generally narrowed.

California’s severe recession in the early 1990s, however, set the state back further. That recession reflected huge losses in the state’s aerospace and defense industries, particularly in Southern California.

Daly noted that employment growth nationally began to pick up in early 1992, although the rebound in California’s labor market didn’t start for another two years.

But since then, California’s high-tech businesses and many other industries have boomed, creating many high-paying jobs and helping even workers at the bottom of the state’s economic ladder.

Over the last seven years, “the real story is that almost everyone is moving up,” said Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy.

What’s more, Levy said with continued economic growth and the likelihood of a rise in the state and national minimum wages, “We can look forward to continued progress for the lowest-earning groups.”

But analysts agree the main challenge will be the influx of poorly educated immigrants into California. These workers command lower incomes than their older, better educated counterparts in the labor force.

For now, that leaves the state with larger numbers of high-income and low-income families, and a narrower middle class than in other states. By the reckoning of Daly’s study, 39% of California’s families are middle class, versus 45% in the 49 other states.

In 1989, the gap was smaller, with 43% of California’s families in the middle class, versus 47% of families in other states.

Her study defined middle-class as the income range from $33,058 to $82,645, which is two to five times the federal poverty line. In 1998, the poverty line for a family of four was $16,529.