From Foresight, Vol. 7, No. 3
published 2000
While income distribution trends in Kentucky have paralleled those of the nation, the divide is deeper here. Using data on family income from the March Current Population Survey, we examine trends in income inequality for Kentucky and the United States.(1) As shown in Figure 1, Kentucky ratios were similar to U.S. ratios in 1977, with income at the 75th percentile approximately 2.5 times greater than income at the 25th percentile.(2) Over the next two decades, the gap widens to 1997 income ratios of 3.1 for Kentucky and 3.0 for the United States.
Figure 1: Ratio to Upper- to Lower-Middle Class Family Income, Kentucky and the US, 1977-1997
As both the nation and state began to recover from the economic downturn of the early 1990s, income ratios declined somewhat from their highest points in 1993 of 3.5 for Kentucky and 3.1 for the nation. However, despite recent economic growth and its positive effect on income distribution, the overall 20-year trend in these ratios is an increasing one. The 1997 values remain substantially higher than the gap of the late 1970s.
Comparison of state and national income ratios also reveals that Kentucky’s income gap, as defined by the 75/25 ratio, remains greater than the nation’s for much of this period. Not since 1977 has Kentucky’s income gap fallen below that of the nation’s and only rarely have the two been equal.(3) Not surprisingly, given the recession of the early 1990s, 1992-1994 saw the greatest differences between these two ratios as Kentucky’s income ratio peaked at a level of 3.5, while the national ratio peaked at 3.1.(4) In addition, the largest decreases occurred in the two years following this peak, as Kentucky and the nation began to recover from the economic recession of the early 1990s. However, national and state declines over the past decade have been insufficient to restore income inequality to pre-1980s levels, and income inequality remains quite high compared to that era.
The changing composition of Kentucky’s income distribution highlights the source of the widening gap between the lower and upper middle classes. The 1980s proved to be especially hard on the lower end of the income distribution, as family income declined at the median and below, while incomes at the 75th percentile and above increased (in 1998 dollars adjusted to represent a family of four). Real income at the 25th percentile dropped 8 percent, from $24,046 in 1979 to $22,105 by 1989. During this same period, real income at the 75th percentile increased 9 percent, from $63,763 to $67,099. Family income increased at both the 25th and 75th percentiles from 1989 to 1997; however, income of the upper middle class grew at a faster rate than lower middle class income—further deepening the divide. Income at the 75th percentile grew 19 percent, to $79,522, from 1989 to 1997, while income at the 25th percentile grew only 13 percent, to $25,048. So, the substantially higher income disparity between the classes in the 1990s, as compared with that of the late 1970s, can be attributed to declines in the income of the lower middle class and the inability of its eventual income growth to offset the continual and higher income growth of the upper middle class. Figure 2 illustrates this point further, showing a 25 percent increase in family income in Kentucky at the 75th percentile, compared to a mere 1 percent for the lower-middle class from 1977 to 1997.
Figure 2: Percent Change in Real Family Income, Kentucky, 1977-1997, and the US, 1973-1997
Analysis reveals similar and more pronounced trends in income disparity at the extremes of the distribution as well. Figure 2 shows income changes in Kentucky at the 10th and 90th percentiles from 1977 to 1997. In contrast to the upper and lower middle classes, real income at the 10th percentile actually dropped during this 20-year period for both Kentucky and the United States. However, the drop was greater for Kentucky. At the opposite extreme, Kentucky’s 90th percentile income increased by the same rate as the rest of the country. Therefore, while higher incomes continue to rise, lower incomes declined faster here than nationally.
Kentucky’s income divide is likely the result of a combination of forces. First, as the value of and demand for high-skill workers increases relative to low-skill workers, the wages of high-skill workers may be driven up in regions with a lower supply of educated workers, further deepening income divides. Kentucky not only lags behind the rest of the country in educational status, but postsecondary enrollment and graduation rates trail as well. In 1996, 59 percent of U.S. high school graduates enrolled in private or public institutions within a year of graduation compared with 50 percent here. Further, a 1999 Council on Postsecondary Education study found that only 36.7 percent of first-time, full-time baccalaureate students who enroll in Kentucky's four-year colleges finish their education within six years. Nationally, 42.9 percent of students in public institutions graduate within five years.
Since wages are the major component of income, a comparison of relative wages between high-school and college graduates further illustrates the effect education and skill have on income inequality. A recent report found weekly earnings for college-educated men in Kentucky exceeded those for high school graduates by about 40 percent in the late 1960s and increased to around 60 percent by the mid-1990s.(5) Similar trends in female weekly earnings were found.
On the flip side, we find a relatively higher supply of and declining labor market opportunities for low-skill workers in Kentucky. High school educated workers are relatively abundant here compared to the nation, further depressing wages. Opportunities are also declining for these workers. A recent report found that “changes in occupational mix in Kentucky suggest that the Kentucky economy has been slowly replacing low human capital jobs with high human capital jobs, and that this replacement has been occurring more rapidly in Kentucky than the nation.”(6)
By some estimates, approximately one third of the increase in the national earnings gap over the past 20 years can be attributed to “[t]he deterioration of unions and the minimum wage ...”(7) In 1997, the real value of the minimum wage was 18 percent less than in 1979. Increases in the 1990s were not enough to compensate for the 31 percent drop during the 1980s.(8) Some argue that differing skill levels are not compensated any more or less than they were in the past, but rather that worker bargaining power is slipping in the face of an increasingly deregulated, global marketplace.(9) While U.S. unionization rates declined from 20 percent in 1983 to 14 percent in 1997, union membership in Kentucky declined from 17 to 10 percent during the same period.(10)
Other possible reasons for Kentucky’s greater income gap include changes in its labor force. From 1989 to 1996, the labor force participation rate of women increased 3.5 percent in Kentucky, compared to a U.S. increase of 1.5 percent. At the same time, the labor force participation of Kentucky men fell 3.8 percent while the U.S. rate declined by only 2.5 percent. Women remain concentrated in lower-paying occupations in the service and retail trade sectors in Kentucky, further deepening the income divide.
The trend toward smaller, single-headed and single-person households may also have had a larger negative effect in Kentucky. While the state population grew by 8 percent between 1980 and 1998 the number of households increased 18 percent. During this same period, the U.S. population increased 20 percent while households rose by 25 percent.
Technology and the global economy are clearly creating winners and losers, but income inequality suggests a poor distribution of the societal benefits they offer. This is especially true for Kentucky. The economic boom of the 1990s has served our citizens well, increasing income at all levels, but it has not been great enough to compensate for the deterioration of income in the 1980s and to restore 75/25 ratio to its pre-1980 level.
A variety of options are available to both state and federal policymakers who want more equal benefits from our buoyant economy. These include, but are not limited to, a more inclusive health care system, higher unemployment insurance, state adoption and federal expansion of the earned income tax credit, larger subsidies for child care and housing, or tax cuts for low-income workers.
Ultimately, the emphasis on excellence and quality in education at all levels will almost certainly narrow the income divide and temper its consequences in Kentucky. Data consistently show that the economic returns to higher education have been increasing, and they will likely continue, as the pace of globalization and technological change show little sign of slowing. Policies that promote enrollment, persistence and graduation at all levels are key. However, the effects of education reform will not be fully realized for many years while the consequences of income inequality have been accumulating for more than 20 years.
* Ms. Watts is a policy analyst with the Kentucky Long-Term Policy Research Center. Return to text.
1 Complete technical appendices are available upon request. Return to text.
2 Complete technical appendices are available upon request. Return to text.
3 Complete technical appendices are available upon request. Return to text.
4 Kentucky’s relatively greater reliance on manufacturing, combined with the cyclically sensitive nature of the industry, could help explain the disproportionate impact of the recession here. Figure 1 shows the difference between U.S. and Kentucky income ratios in 1994, before the eventual recoveries of both from the economic shock of the 1990-1991 recession. Return to text.
5 Mark C. Berger, “Education and Earnings in Kentucky, 1964-1996,” 1998 Kentucky Annual Economic Report (Lexington, KY: University of Kentucky Center for Business and Economic Research, 1998): 19-24. Return to text.
6 The University of Kentucky Gatton College of Business and Economics Center for Business and Economic Research, Long-Term Trends in the Kentucky Economy (Lexington, KY: Author, 1999): 40. Return to text.
7 Louis Uchitelle, “Making Sense of a Stubborn Education Gap,” The New York Times 23 July 2000: 4-3. Return to text.
8 Jared Bernstein, Elizabeth C. McNichol, Lawrence Mishel, Robert Zahradnik, Pulling Apart: A State-by-State Analysis of Income Trends (Washington, D.C.: Center on Budget and Policy Priorities and Economic Policy Institute, 2000). Return to text.
9 Bernstein et al.; David Howell, “Skills and the Wage Collapse,” American Prospect 19 June-3 July 2000: 74-77. Return to text.
10 March Supplement to the Current Population Survey. Union membership increased slightly in Kentucky to 12 percent in 1999. Return to text.