Wage Inequality Is Becoming Hard to Measure

March 13, 2019

According to the Economic Policy Institute’s report, State of Working America Wages 2018, wage inequality has worsened over the past few years — to the point where it even threatens data reliability.

The EPI analyzed the Current Population Survey (CPS), a monthly survey from the Bureau of Labor Statistics and the U.S. Census Bureau, to compare wage growth for low-, middle- and high-wage workers in 2018. However, in making their analysis, the EPI found that earnings gaps have become so stark, they’re becoming difficult to measure.

The problem lies in “top-coding,” a method that limits reporting of earnings above a certain threshold. In the report, Senior Economist Elise Gould writes:

The CPS is one of the best measures of hourly pay because it allows researchers to analyze differences across the wage distribution and by demographic characteristics. However, for confidentiality reasons, the CPS “top-codes” weekly earnings: All workers who report weekly earnings above $2,884.61 (annual earnings for full-year workers above $150,000) are recorded as having weekly earnings of exactly $2,884.61, to preserve the anonymity of respondents. This top-code amount of $2,884.61 hasn’t changed or been updated for inflation in 20 years and, as a result, a growing share of workers are assigned this weekly earnings value rather than having their actual wages reported.

This makes it difficult to determine actual wage growth at the top, although Gould notes that other data indicate that “wage growth is far more concentrated at the top than can be illustrated using the CPS, with growth at and within the top 1 percent exhibiting growth orders of magnitude faster than at the 95th percentile.”

In other words: the rich are getting richer, and they’re doing it so quickly, they’re outpacing some of the instruments that would measure their earnings relative to everyone else’s.

Do You Know What You're Worth?

Wage Growth Is Concentrated at the Top

Despite the fact that the U.S. unemployment rate is just 3.8 percent, wages have grown slowly for most workers during the past few years.

Economists expect a strong job market to positively affect wage growth, as a general rule. But, that hasn’t been in the case during the latest recovery. In fact, The PayScale Index, which measures the change in wages for employed U.S. workers, shows that real wages have declined 9 percent since 2006, prior to the Great Recession.

Toward the end of 2018, the unemployment rate fell to 3.7 percent. That’s the lowest it had been since December of 1969, marking 96 consecutive months of job growth – a full eight years. Other measures also indicate the economy is strong right now, like the stock market and the GDP. Still, wage stagnation is negatively affecting many workers and their families and communities.

However, high-wage earners are having an entirely different experience.

Since 2007, which marked the pre-Great Recession labor market peak, the top 10 percent of earners have experienced the strongest wage growth. From 2017 to 2018, the growth was especially significant for the top 30 percent. The 95th percentile saw a 2.7 percent gain that year. The 20th percentile saw the most significant gains, 4.8 percent. And, the 30th percentile enjoyed a 3.7 percent wage increase. Median wages, on the other hand, grew just 1.6 percent over the course of the year.

How do your earnings stack up? Take the PayScale Salary Survey and get a free salary report.

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Wage gaps are growing

back-channel reference — Christina Morillo/Pexels

The racial/ethnic wage gap has only gotten wider over the course of the last 18 years. The black-white wage gap has increased from 10.2 percent in 2000 to 16.2 percent in 2018.

The gap is slowly closing for a few demographics, according to the data. For example, excluding the top 20 percent of the wage distribution, Hispanic workers have been narrowing the gap with white workers in recent decades. It was 12.3 percent in 2000 compared with 11.8 percent in 2018.

The gender wage gap is smallest among the lowest 10th percentile of wage earners — 5.9 percent. At the 95th percentile, however, women are paid 33.6 percent less in 2018 than men in the same percentile.

There has been a slow narrowing of the gender wage gap since 2000 for women with high school diplomas or those with some college. But, the EPI found that the gender wage gaps were wider for those with less than a high school diploma, college degrees and advanced degrees than they were in 2000.

For more on the gender pay gap, read PayScale’s report, The State of the Gender Pay Gap.

These Workers have experienced the most wage growth since 2000

Wage growth for white and Hispanic workers has been about four times faster than that experienced by black workers in the 20th through the 70th percentiles. In fact, the 60th and 70th percentiles of black wage distribution are currently below their levels from the year 2000.

The strongest growth for white workers was experienced by those in the 95th percentile. Since 2000, white workers across wage distribution saw at least 7.3 percent wage growth.

Between 2000 and 2018, Hispanic workers experienced relatively widespread wage growth, at the top as well as for the median and the bottom. However, from 2017 to 2018 these wages faltered and many percentile ranges experienced stagnation or even declines.

Other Research Shows Similar Findings

The EPI isn’t the only organization to note widening income gaps. And, workers in the U.S. aren’t the only ones experiencing this problem. The global statistics on income inequality are equally alarming.

The World Inequality Report 2018 found that income inequality is increasing in nearly all regions of the world in recent decades. Here are a few key statistics from that report:

The top 1 percent of income earners worldwide earn a 20 percent share of the total income for all workers. They earned 16 percent of the total in 1980.
Since 1980, the top 0.1 percent of income earners worldwide have experienced as much income growth as the bottom half of the world’s population. This is despite the fact that the poorest half of the world’s population has seen significant income gains thanks to high rates of wage growth in Asia.
Income growth has been “sluggish or even nil” for individuals between the bottom 50 percent and top 1 percent globally. This includes lower- and middle-income groups in North America and Europe.

Data on global wealth inequality is even more substantial than data on income. The top 10 percent owns more than 70 percent to the total wealth of Europe, the United States and China. The bottom 50 percent own less than 2 percent. If these trends continue, the top 0.1 percent in China, the E.U. and the U.S. is expected to own as much wealth as the global middle class by 2050.

[click_to_tweet tweet=”Since 1980, the top 0.1 percent of income earners worldwide have experienced as much income growth as the bottom half of the world’s population. ” quote=”Since 1980, the top 0.1 percent of income earners worldwide have experienced as much income growth as the bottom half of the world’s population. “]

wage stagnation Despite a STrong economy

So, why are wages so stagnant when the U.S. economy is strong by so many measurable standards? Here are just a few reasons:

Low minimum wage – For most U.S. workers, real wages have barely changed for decades. The cost of living has increased, however.
Lower participation in unions – Although many public-sector workers are sticking to the union, union membership overall has been steadily declining for decades. And, union members earn more than nonunion workers. Right-to-work laws are negatively impacting membership in many states.
Culture – There are also cultural and societal reasons that U.S. workers are experiencing such dramatic income inequality. It’s become more culturally acceptable for CEOs to earn lavish incomes while workers at the bottom take home a minimum wage. In response, some billionaires have signed The Giving Pledge, a commitment by wealthy individuals and families to donate the majority of their wealth on or before their deaths. But, cultural norms certainly don’t mandate this kind of philanthropy, or anything close to it. So, the problem has continued to escalate.
Wealth holds up through crisis – When times get tough, like during the Great Recession of the past decade, wealthy people tend to hold up fairly well financially, In fact, the rich often get richer through recovery. Individual workers and their families, whether they’re low-wage earners or middle-income, can’t say the same.

What can be done?

The research is clear. Wage inequality is rising in the U.S. and wage gaps by gender and race persist, even today. In some cases, things are even getting worse. Unless changes are made, these problems will worsen. And, these inequalities don’t just impact individuals. They impact families, communities and the economy at large.

The World Inequality Report states that policies can make a huge difference in starting to level the field: “The fact that inequality levels are so different among countries, even when countries share similar levels of development, highlights the important roles that national policies and institutions play in shaping inequality.”

Changes must take root at the policy level if they are to make a significant impact. Per the EPI:

What also stands out in this last year of data is that, while wages are growing for most workers, wage growth continues to be slower than would be expected in an economy with relatively low unemployment. Given this slow wage growth, policymakers should not presume that the economy has already achieved (or even surpassed, as some claim) full employment. Instead, policymakers should try to keep labor markets as tight as possible for as long as possible to see if wage growth lost during the Great Recession can be clawed back, and to see if wage disparities by gender and race can be reduced.

For example, the EPI report found that the earnings of low-wage workers grew more in states that increased their minimum wage in 2018. Tenth-percentile wages grew just 1.6 percent from 2017 to 2018 in states without minimum wage increases. However, in states with increases, including the District of Columbia, wages rose 2.1 percent during the same time period.

More than 100 economists have shown that they stand in solidarity with low-wage workers by signing a letter in support of increasing the federal minimum wage to $15 by 2024. They’d also like to phase out the sub-minimum wage for tipped workers — which has been at $2.13 since 1991. The letter also details how this change would positively impact not just low-wage workers and their families, but also their communities and the economy.