Originally created 09/06/98

Widening income inequality halted -- but for how long?



WASHINGTON -- When Byron Larsen moved from Alaska to San Francisco six years ago, he started temping as a secretary.

It was a good option for the then 28-year-old. He had strong typing and computer skills, but no college degree. Permanent jobs were scarce. Economic growth was so weak -- especially in California -- that many economists expected the dawning recovery from the 1990-91 recession to fizzle.

Larsen's situation typified the times. Down-sizing was a corporate watchword and a two-decade-old trend of growing income inequality -- the rich getting richer and the poor, poorer -- was getting worse.

But about two years ago, as the nation's unemployment rate sank toward 5 percent and employees' bargaining power increased, that income trend began to change. So did Larsen's resume. He went to work for an accounting firm, Ernst and Young, and last year was promoted from secretarial work to a position tracking sales and market trends for the firm's real estate consulting business.

"Basically, everything I've asked for, I've gotten. I asked for full-time marketing and that happened. Last year, I got a raise and I asked for more and they gave it to me," he said.

The economic expansion -- which in November will become the longest peacetime stretch of uninterrupted growth in U.S. history -- finally is paying off for wage earners like Larsen, not just for MBAs and computer programmers.

The median-wage worker -- meaning half earned more and half less -- received an inflation-adjusted wage increase of 2.6 percent, at an annual rate, during 1997 and the first half of this year.

That compares with declines averaging 0.8 percent a year from 1989 to 1996, according to an analysis of Labor Department data by the Economic Policy Institute, a liberal research group.

The worker at the 20th percentile -- meaning 80 percent earned more and 20 percent less -- saw a 3.6 percent annualized real gain in the 18 months ended in June, compared with a 0.3 percent a year decline during the previous seven years.

And earners at the 90th percentile -- 10 percent earned more and 90 percent less -- saw annualized gains of 2.3 percent from 1996 to mid-1998 and, on average, no change from 1989 to 1996.

In other words, everyone is doing better now that unemployment is near the lowest in 28 years. But those at the bottom are getting a proportionately bigger boost.

However, just as the benefits of the strong economy are beginning to trickle down, they could be choked off by weakness seeping into the economy from Asia.

"The improvement in income distribution of the last several years is in jeopardy," said economist Mark Zandi of Regional Financial Associates in West Chester, Pa.

Loss of export sales to Asia and competition from inexpensive Asian imports has stalled growth in U.S. factory production. Some weakness eventually should spread from manufacturing into services. That will send unemployment inching back toward 5 percent -- not a severe deterioration, but perhaps enough to keep the income gap from narrowing further.

"The best wage growth is probably behind us. As the economy slows, wage growth will slow. As the unemployment rate starts to rise, we'll see most workers fall behind inflation again," said Lawrence Mishel of the Economic Policy Institute.

Economists differ on the reasons why the income gap widened in the first place and thus on the prospects it might resume widening. Mishel cited the decline of unions' bargaining power, the loss of manufacturing jobs and the prevalence of stock options and other lucrative benefits for senior managers.

Other economists see the gap as a product of the increasing premium put on skills and education in a computer-dominated, high-technology workplace. To the extent that's true, the fact that unemployment has remained low -- at or under 5 percent for the past year -- could restrain any shift back toward a growing income gap.

"People who have jobs build human capital by virtue of having the job. They don't lose that when the (economic) cycle changes," said Rob Shapiro, under secretary of Commerce for economics. "The more skilled they are, the less likely they are to become unemployed -- or the more likely they are to become re-employed."