Income inequality has grown so severe in recent years that Federal Reserve Board Chair Janet Yellen described it as a source of great concern. In a speech earlier this month Yellen said, “The distribution of income and wealth in the United States has been widening more or less steadily for several decades, to a greater extent than in most advanced countries.”
In some parts of the U.S., the problem of income inequality is especially pronounced. Based on the Gini coefficient, which measures the degree to which incomes deviate from perfect equality, 24/7 Wall St. reviewed the states with the widest gap between the rich and the poor. Last year, New York was the most unequal state in the nation.
In an interview with 24/7 Wall St., David Cooper, economic analyst at the Economic Policy Institute, said that “the root of income inequality really is the stagnation in pay and wages for the vast majority of Americans.” Cooper explained that while most people generate their incomes from wages, the wealthiest Americans generate income from returns on capital. When wages stagnate and more income is generated through investments, the income gap is exacerbated.
Cooper added that while some individuals with extremely high incomes took a major hit during the Great Recession, the very rich have “made up all that lost income since then, and incomes for the top are higher than they were prior to the recession at this point.”
The growing incomes of extremely wealthy individuals explain, in part, why a majority of states with the widest income gaps appear quite wealthy as a whole. According to Cooper, “they skew the distribution so much that you do tend to see the highest inequality in places that have the most wealthy individuals.” In fact, each of the 10 most unequal states also had among the highest shares of income going to the top-earning 5% of households last year. In New York and Connecticut, more than 25% of all income was reported by these households.
The types of occupations of state residents also plays a role. Cooper explained that while there are highly paid executives in all states, they are more concentrated in places like New York. He added, “Doctors, attorneys, [and] people who work in finance are obviously going to be making more money than folks working in traditionally lower-paying industries like manufacturing or the service industry.”
As an example, six of the states with the worst income inequality had among the 10 highest share of employees in finance-related fields, while five had among the 10 highest share of the work force in professional, scientific, and management occupations.
Since wages are the primary source of income for most Americans, the unemployment rate in a given area is also an important factor. Six of the 10 states had unemployment rates higher than the national rate last year. Cooper added, however, that employment plays less of a role in differentiating one state from another because residents can move easily between states.
To identify the states with the worst income inequality, 24/7 Wall St. reviewed Gini coefficient figures from the U.S. Census Bureau’s 2013 American Community Survey (ACS). The Gini coefficient reflects the degree to which an area’s incomes deviate from a perfectly equal income distribution. The coefficient is scaled from 0 to 1, where a 0 represents perfectly equal incomes among all people. We also utilized ACS data on poverty rates, income distribution among households, the percentage of households receiving SNAP benefits/food stamps, and the distribution of employment by industry. Figures for average annual unemployment and the percentage of hourly workers earning the minimum wage or less are from the Bureau of Labor Statistics for 2013.
These are the states with the widest gap between rich and poor