Despite the country’s unemployment rate falling below 5% in January for the first time since 2008, and the Federal Reserve’s decision to raise interest rates for the first time since 2006, concerns about wage growth — particularly among middle earners — remain. Since 2010, as the country began to recover from the Great Recession, income of the top 20% of households grew 3.7% from 2010 through 2014. During that time, incomes of the middle 20% of households declined 0.7%.
Based on income earned before taxes by the third quintile — the middle 20% of earners in each state — middle class incomes in Rhode Island declined the most in the country. Incomes among middle class Rhode Island households fell by 3.1% from 2010 to 2014, while income among the state’s fifth quintile, the top 20% of state households, grew by 4.5%. Based on an analysis of household incomes among America’s middle class, these are the states where the middle class is suffering the most.
Consumption is by far the largest component of GDP. Because middle income families typically spend large shares of their income on goods and services, America’s middle class is expected to drive up consumption — and by extension, GDP. While high income households are able to spend enormous sums of money, there is often only so much an individual can spend, even on luxury goods.
Despite being essential to economic growth, middle class incomes have suffered from wage stagnation. According to the Economic Policy Institute, an economic and social policy think tank, one reason that middle class incomes have remained flat for decades is the divergence of productivity and wage growth. Just after World War II — a time many have called America’s golden age — productivity and wages both increased more than 90%. Since 1973, productivity has continued to climb, increasing 74.4%. Meanwhile, however, wages have increased by less than 10%. This means owners and investors, many of whom comprise the wealthiest 20% of households, have by and large reaped the benefits of the greater productivity. The workers, on the other hand, have not seen comparable wage increases.
Wealthier households have also benefited from the strong stock market performance in recent years. Despite weak returns in 2015, all three major U.S. indices hit all-time highs during the year, allowing those with money invested to earn even more. With the rich holding a disproportionately large share of money in the stock market, their incomes have recovered to their pre-recession levels much faster than those of middle class workers.
In all 10 of the states where the middle class is suffering, the share of total income earned by the bottom 80% of households fell from 2010 through 2014 and was redistributed to the highest quintile. The top 20% of U.S. households held more than half of total income in 2014, up 1.08 percentage points from 2010. Even among top earners, income was not evenly distributed. During that five-year period, the top 5% of households accounted for more than 85% of income gains for the top 20% of earners.
Declining union membership may also have contributed to the suffering of the middle class. In 1979, 24.1% of American workers belonged to a union. Today, just 11.1% of Americans are unionized. The decline of union membership has largely mirrored the shrinking of middle class incomes.
A state’s tax environment can also sometimes exacerbate income inequality. A 2015 report by researchers at the Federal Reserve Board of Governors found that federal taxes tend to minimize inequality. States taxes on gas and goods, however, can have the opposite effect. And since these are consumed by rich and poor alike, poorer households tend to pay greater shares of their income on these taxes. In all but one of the states where the middle class is suffering, consumers are required to pay sales tax.
These are the states where the middle class is dying.