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Press Release · February 9, 1999

Gulf Between Rich And Poor Widens In State, Despite Economic Boom

Immigration, Changing Earnings Value of Education Are Key Causes of Rising Income Inequality

SAN FRANCISCO, California, February 9, 1999 – The gap between the rich and poor in California has grown, despite the state’s remarkable economic expansion, according to a new study released today by the Public Policy Institute of California, California’s Rising Income Inequality: Causes and Concerns. The study also suggests that education – the issue that has created a ground swell of public concern and brought the State Legislature into special session – may be crucial to mitigating this disturbing trend.

The study, authored by economist Deborah Reed, follows up a 1996 PPIC report that showed income inequality in California rising sharply between 1969 and 1994 and growing faster in California than in the nation as a whole. Because the state was still in recession in 1994 and the economic recovery since then might have reduced the income gap, the new study extended the analysis to 1997. It found that income inequality in the state was actually higher after the recession than before and remains substantially higher than in the rest of the nation.

“What makes this inequality in California more troubling is that it is not just about the rich getting richer, but about profound losses at the bottom,” said Reed. “Clearly, the poor are not sharing in California’s economic prosperity.”

Reed found that while incomes fell across the board during the recession, those at the mid-to-lowest ranges were not able to make up lost ground as successfully as those at the top, during the recovery. For instance, a household of four at the bottom 10 percent of the income distribution had a real income of $15,000 in 1989. During the early 1990’s, in the depths of the recession, that number fell to $11,300. As of 1997, income remained below pre-recession levels at $13,000. For the upper-middle and top of the distribution, there has been income growth and a full recovery from the recession. At the 90th percentile, income was $121,500 in 1989, fell to $117,400 in the early 1990’s, and grew to $130,600 in 1997.

Why is the income gap expanding in California? Focusing on male earnings, the study identified two leading factors: the changing earnings value of education and experience, and immigration.

The effect on earnings of how much education a man has and how long he has worked explains much of the rising income inequality. In 1969, a U.S.-born male with a bachelor’s degree earned almost 50 percent more than a similar worker who had only a high school diploma. By 1989, the difference had increased to over 60 percent and by 1997 it was nearly 70 percent.

Like the increase in income inequality, the changing earnings value of education results more from falling wages for men at the bottom of the distribution – in this case the education distribution – than from increases for men at the top. Between 1969 and 1997, mean weekly wages for U.S.-born males with 15 years of labor market experience and no high school diploma declined by one-third, falling from $750 to about $500. Mean wages for similar males with a bachelor’s degree remained fairly stable at about $1200. “Simply put, the earnings of workers with less than a bachelor’s degree have eroded dramatically,” explained Reed.

Immigration also contributed to rising income inequality in the state because the proportion of immigrants in the state’s workforce has grown substantially, and it has grown the most at the bottom and lower-middle of the income distribution. In 1969, immigrants accounted for 10 percent of the overall male workforce and close to 15 percent of the workers at the bottom one-third of the income distribution. Between 1969 and 1997, the share of immigrants in the male workforce rose to 36 percent, but this growth is clustered at the bottom of the income distribution.

Californians appear to be profoundly aware of income inequality and its relative seriousness in California compared with the nation as a whole. In a recent PPIC Statewide Survey, 56 percent of Californians said they believe that the state is divided into “haves” and “have nots.” By comparison, according to a 1998 Gallup survey, 39 percent of Americans see American society as so divided, while 59 percent disagree. A surprisingly large number of Californians – 35 percent – said they considered themselves to be “have nots,” while 57 percent described themselves as “haves.”

“Given the trends and the causes we identified, it seems reasonable to anticipate continuing high income inequality in the state’s future,” said Reed. “This raises serious concern about the wellbeing of low-income people, about equal opportunity, and about the potential social consequences of the growing divide between the rich and poor.”

To address this concern, the study suggests a number of policy options related to the major causes of income inequality, mostly involving education and training. Specifically, the report recommends improving opportunities to finish high school and enter college, improving K-12 education and training for those who do not go to college, and actively promoting the economic progress of immigrants and their children through education and training.

The Public Policy Institute of California is an independent, nonprofit organization dedicated to nonpartisan research on economic, social, and political issues that affect the lives of Californians. The Institute was established in 1994 with an endowment from William R. Hewlett. David Lyon is President and CEO of PPIC.