The Elephant in the Boom: Global, U.S., and District income inequality in an era of general economic expansion and globalization

The “Elephant Chart”

Across most developed countries, including the United States, income growth has stagnated for low and middle class workers over the last several decades. Real GDP per capita for the U.S. grew merely 36 percent cumulatively during the 20-year period from 1988 to 2008. This period also saw some of the greatest growth stories in world history for China and India, as Chinese and Indian real GDP per capita, as measured in constant international dollars, has increased by 560 percent and 230 percent, respectively, during the same 20-year period, according to data from World Bank.

The stark contrast in global income growth between developed and developing nations is captured succinctly by the graph known as the “Elephant Chart,” as shown in Figure 1. This much-discussed chart was produced by the former World Bank economist Branko Milanovic last summer. We borrowed the chart from Branko Milanovic’s blog.  The chart ranked the world’s households from the poorest 1% to the richest 1%. At each percentile, the chart shows the growth in income between 1988 and 2008, an era of increasing globalization.

The chart, nicknamed the “elephant chart” because of its peculiar shape, shows that in the last few decades the “global middle classes,” mostly from China and India (point A) and the world’s elite (point C) have gained income significantly in the era of globalization, while income for the middle classes in the richest countries (point B) have stagnated. According to Milanovic, from 1988 to 2008, relative income growth was 75 percent for the developing world middle classes and 65 percent for the global top one percent, but only 0-5 percent for the rich countries’ middle classes. Despite acknowledging that correlation is not equal to causation—many economists nevertheless point to the chart as proof that globalization allowed developing countries like China and India to grow at the cost of middle class workers in rich countries.

Figure 1: Change in Real Income Between 1988 and 2008 at Various Percentiles of Global Income Distribution (Calculated in 2005 International Dollars)image001

Source: Branko Milanovic’s blog

How does the U.S. compare?

The “elephant chart” is an interesting and remarkable chart. One may wonder how the contours of inequality for the U.S. and Washington DC look when compared to the “elephant chart.”  Using the Public Use Microdata Sample (PUMS) data from the Census Bureau, we have created our own “elephant charts” for the United States and for the District of Columbia between 2001 and 2015. We will also compare the DC chart based on Census data, with the chart based on personal income tax data collected by the District government. We chose Census data for this specific period mainly for comparison purposes because DC income tax data is available only for this period.

The pattern of inequality in the United States is much different from the world’s. Figure 2 illustrates something that is all too familiar: for the past 15 years, which includes a mild recession and a financial panic, the country’s middle class and the poor have seen their incomes fall. In fact, households in the bottom 75 percent of distribution have experienced income losses of 8 percent on average during the 15 years from 2001 to 2015. Households in the top 25 percent of distribution, on the other hand, have experienced real income gains averaging 5 percent. The upper-class households in the top 5 percent of the distribution have been doing particularly well, with income gains averaging about 14 percent during the same period. The pattern does remind us of the so called “Matthew Effects,” where the rich get richer and the poor get poorer.

Figure 2: Real Income Gains Between 2001 and 2015 for U.S. Households at Various Percentilesimage002

            Source: U.S. Census Bureau

How about the District?

In contrast to the income trend nationally, the majority of households in Washington DC saw their incomes rise, especially among middle-income percentiles. The DC contour, as shown in Figure 3, is “elephant-like:” Middle class households and top earners in the District have experienced the largest income growth.

Figure 3: Real Income Gains for DC Residents at Different Percentiles Between 2001 and 2015image004

            Source: U.S. Census Bureau

Since the Census data for DC is survey based on a sample size of only about 3,600 DC households, the sampling error is relatively large. On the other hand, the number of tax filers in DC averages about 360,000 per year.  The blue line in Figure 4 shows the distribution of before tax income growth for DC based on DC tax filer data. Consistent with the chart based on census data, most DC residents have experienced income gains even after taking inflation into consideration. This is a clear contrast with the national pattern. One notable feature of Figure 4 is that residents at around the 21st to 25th percentiles experienced stagnant income growth. Low income tax filers from the 5th to 20th percentiles fared better. We believe this may be attributable to DC minimum wage policy. Since 2001, the DC minimum wage has grown much faster than inflation. As shown in Figure 5, the DC minimum wage had increased by 71 percent while the cost of living had increased by 41 percent. Thus, residents who have benefitted from the rising minimum wage (those in the 5th to 20th percentiles) have seen their income growing faster than residents working at wage rates just above the minimum wage (those in the 21st to 25th percentiles).

Figure 4: Before and After Tax Real Income Gains for DC Residents at Different Percentiles Between 2001 and 2015 Based on Income Tax Dataimage006

            Source: Office of Tax and Revenue

Figure 5: DC Minimum Wage VS the Consumer Price Index (CPI)image008

            Source: U.S. Department of Labor

The red line in Figure 4 shows an income growth pattern after adjusting for the District government’s tax policies such as taxable deduction, exemption and refundable and nonrefundable tax credits. The area between the blue line and the red line represents increase in income growths that was due to tax policies. The poor apparently benefited significantly from this tax policy. The DC earned income tax credit (EITC) did most of the job in helping the low-income residents (at or below the 30th percentile), as the District’s EITC credit has increased from 25 percent of the federal credit amount in 2001 to 40 percent of the federal amount since 2009.  For reference, Table 1 shows how much income DC tax payers earned in 2015 at certain percentiles both before and after tax.

table1

Source: Office of Tax and Revenue

Table 2 takes another look at how taxpayers at different income percentiles fared from 2015. The share of total income for the bottom 30 percent is much lower despite their relative increase from 2001 to 2015. The bottom 30 percent taxpayers earned only 5 percent of total before-tax income in 2001, and this percentage dropped to 4 percent in 2015. The DC Income tax schedule did help the taxpayers in the bottom 30 percent by maintaining their after-tax income share at 5 percent from 2001 to 2015.

The middle class, typically defined as households with income between the bottom 30 percent and the top 20 percent, fared slightly worse, with the before-tax and after-tax income shares declining by one percent and two percent respectively between 2001 and 2015.

The top 20 percent upper class households fared much better than the middle class by gaining both before-tax and after-tax income shares. The top 1 percent received a lion’s share of 23 percent of total before-tax DC income in 2001, and this percentage increased to 24 percent in 2015. The top 1 percent actually benefited more from the DC tax policy as their share of total after tax income increased from 20 percent in 2001 to 23 percent in 2015.

Table 2. Income as a percentage of total taxable income for taxpayers at different percentiles of income distribution

table2a

In conclusion, we have gained substantial knowledge about inequality in DC and in U.S. from reproducing the “elephant chart” for the period between 2001 and 2015. We found that households in Washington DC on average experienced faster income growth than their counterparts in the nation for this period. Although the top one percent earners in DC and in the U.S. have both done well, the middle class in DC actually experienced real income gains, while the middle class in the U.S. experienced real income losses. We also want to emphasize that DC’s minimum wage and tax policies have helped lower income DC residents gain income faster than their national peers.

What exactly is this data?

Our data on personal income tax is from Office of Tax and Revenue personal income tax returns for tax year 2001 to 2015. The minimum wage and inflation data is from the Bureau of Labor Statistics, U.S. Department of Labor. Public Use Microdata Sample data (PUMS) from the Census Bureau was also used to calculate the distribution of income growths for the U.S. and DC.

Fitzroy Lee, Stephen Swaim and Bob Zuraski contributed to this post.

Job growth in food services in DC has bounced back from last year’s slowdown, but retail has not

New stores and restaurants are tangible evidence of the continued growth of DC’s economy, and these sectors have also been important contributors to employment growth since the Great Recession. Food services and retail combined accounted for 25.2% of the increase in all DC private sector employment in the 7 years since April 2010, when the recession’s effects on DC employment were beginning to wear off. The share of all private sector jobs in food services and retail increased from 11.8% in April 2010 to 13.9% in April 2017—from one in every 8.5 jobs to one in every 7.2.

table 1a.PNG

During most of 2016, however, the amount of increase over the prior year in jobs in food services and retail began to slow down. From December 2015 to August 2016 the annual gain in food services fell from 3,000 per year to just 500. Retail fell from 1,200 to 400. In the fall of 2016, the pace of job growth in food services picked up, but retail continued to slow down. In April 2017 food services employed 2,700 more workers than a year earlier, but retail employed 230 fewer people.

 

graph 1.PNG

In the years since the Great Recession, there have been ups and downs in food service and retail employment growth. For example, the pace of food services growth hit a high of 3,867 in December 2011, and fell by more than half (to 1,600) a year later. Retail job growth was slightly negative for a brief period in the summer of 2011 and then rose steadily to a gain of 1,433 in June 2014, But the drop in 2016 was the most significant since 2010.

graph 2

Measured as percent change over the prior year, growth in both food services and retail has been greater over most of the post-recession period than for the rest of DC’s private sector. Only toward the end of 2016 did the rates begin to converge.

graph 3.PNG

Outlook. For the three months ending April, the increase in food service jobs over the prior year, 2,700, was slightly above the average for the past seven years, and the percent change, 5.3%, was slightly below the 5.7% average annual growth over that time. The sector would therefore seem to be poised to add additional jobs if DC’s population, employment, and income continue to grow along the lines of the prior year.

On the other hand, food services employment in the US has been slowing over the past year, falling from a 3.9% rate of growth in April 2016 to 2.2% in April 2017. Although the percentage growth of the sector in DC has generally been above the US average for most of the past decade, DC’s rate of growth last summer declined much faster than the national growth rate. By August 2016 DC’s increase in food services jobs was just 1% while the US rate was over 3%. If the rate of increase in US food services continues to slow or stays at a low level, it remains to be seen whether DC food services jobs can continue to outpace the US as it has over the past several months.

graph 4.PNG

 

Nationally, the rate of growth of retail employment has fallen over the past year, going from 1.6% in April 2016 to 0.5% in April 2017. DC’s recent decline in retail jobs is thus consistent with national trends, just more exaggerated. For most of the past decade, DC’s rate of growth in retail jobs was well above the US average. Then over the past year DC’s rate of growth fell from 3.8%—more than twice the US rate—to negative 1%. Looking ahead, in addition to factors such as population, employment, and income growth, the retail sector faces the twin headwinds of on-line commerce and checkout automation that could make it harder to sustain job increases in the retail sector.

graph 5.PNG

 

table 2

About this data. All data is wage and salary employment in DC and the US from the US Bureau of Labor Statistics (BLS). The date is calculated as 3-month or 12-month averages from the monthly series.  The April 2017 amounts used here reflect revisions to the data contained in the May 2017 monthly release from BLS.

Note: A version of this blog appeared in the June 2017 District of Columbia Economic and Revenue Trends, issued by the DC Office of Revenue Analysis.