Kentucky Among 10 States with Fastest-Growing Income Inequality

Report Release: “Pulling Apart: A State-by-State Analysis of Income Trends

New Report: Kentucky Among 10 States with Fastest-Growing Income Inequality

Policies Drive Widening Gap Between Low-Income Kentuckians and High Earners

Income gaps widened more in Kentucky than in all but eight other states between the late 1990s and the mid-2000s—and more than all but three other states from the late 1970s to the mid-2000s—according to a new study by the Center on Budget and Policy Priorities and the Economic Policy Institute.

“Whether you’re a corporate executive or a laborer, hard work should pay off,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “Instead, we’re seeing a Kentucky where the richest households do well while low- and middle-income Kentuckians struggle to maintain their standard of living. This deepening economic divide is harmful to our economy and to our political system.”

The report, Pulling Apart: A State-by-State Analysis of Income Trends, finds declining incomes for low- and moderate-income Kentuckians and substantial long-term income growth for high earners.

  • While the average income of the poorest fifth of Kentucky households declined 11.8 percent between the late 1970s and mid-2000s—the worst decline seen in any state—the average income of the richest fifth of Kentucky households grew 61.7 percent over that period.
  • In the late 1990s, the average income of the richest fifth of Kentucky households was 7.4 times more than the average income of the poorest fifth, but by the mid-2000s that ratio had grown to 9.1.
  • From the late 1990s to the mid-2000s, the incomes of the poorest fifth of Kentucky households declined by 17.2 percent, and the middle fifth declined by 6.2 percent, while the richest fifth of Kentucky households maintained their average income.

Income inequality is rising in Kentucky for a range of reasons, with the growing gap in wages playing a major role. Widening wage inequality is due to such factors as long periods of high unemployment, a decline in better-paying manufacturing jobs due to trade and other policies, and a minimum wage that has not kept up with price increases.

While many of the policies driving income inequality are at the federal level, Kentucky policymakers can do more to address the disparity between the rich and the poor. The state needs to invest more in low-income workers and families and enact reforms that make our tax system fairer.

“The benefits of economic growth have gone disproportionately to high earners,” said Bailey. “State tax policies that shift tax responsibility away from those most able to pay will worsen our already growing inequality, while proposals like an earned income tax credit and a more progressive income tax can help mitigate the problem.”

The joint CBPP/EPI report, as well as a press release and state fact sheets, are available here: http://www.cbpp.org/cms/index.cfm?fa=view&id=3860

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The Kentucky Center for Economic Policy is a non-profit, non-partisan initiative that conducts research, analysis and education on important policy issues facing the Commonwealth. Launched in 2011, the Center is a project of the Mountain Association for Community Economic Development (MACED).

The Money Gap Widens in Kentucky

The State of Working Kentucky: Gender

As in the U.S. as a whole, women’s participation in the paid workforce in Kentucky has grown over the last thirty years. Also, the gap in wages between Kentucky men and women, while still large, has been shrinking. However, that gap has narrowed in part because men’s wages have weakened, and male participation in the Kentucky workforce has also been declining.

The gap in median wages between men and women has shrunk substantially in Kentucky over the last 30 years (see below). Whereas in 1981 the median female wage in Kentucky was only 62 percent of the median male wage, in 2011 the median female wage was 88 percent of the median male wage. However, this convergence is only partially because median female wages have grown—it’s also because male wages have not. Real female median wages in Kentucky grew by 27 percent over that period while real median male wages fell 10 percent.

The gender gap remains in part because of men’s concentration in better-paying industries as well as the higher wages men typically receive within industries and for particular jobs. Women tend to be in lower-paying industries, like education and health services, and in lower-paying jobs across all industries. The decline of traditionally male industries, like manufacturing, plays a major role in the lack of male wage growth.

 gender image 1.5_0

Source: Economic Policy Institute analysis of Current Population Survey Data

In recent years, both men and women in the Commonwealth have failed to see progress in wages. Median male wages in Kentucky fell 10 percent between 2001 and 2011, while median female wages grew only 2 percent.

Changing gender roles, demands for two-earner families because of stagnant wages, declines in traditional male job opportunities, and other trends are also leading to a convergence in the share of men and women who are in the paid labor force in Kentucky. The share of working-age Kentucky men participating in the labor force declined from 76 percent in 1981 to 67 percent in 2011, while the labor force participation rate for working-age Kentucky women rose from 50 percent to 56 percent over that period. However, female labor force participation has remained about flat for the last ten years while the male rate has continued to decline.

 gender image 2.5

Source: Economic Policy Institute analysis of Current Population Survey Data

Due to ongoing discrimination and the persistence of traditional gender roles, women continue to be paid less than men in Kentucky. However, those roles are changing at the same time that opportunities for decent-paying jobs traditionally available to men are in decline. And both men and women continue to struggle in a labor market that simply is not providing enough good jobs.

These realities present the need for state and federal policymakers to further address gender discrimination and gender-based wage disparities—building on the success of the Lilly Ledbetter Act—while doing more to protect and grow good-paying jobs accessible to both women and men.

The State of Working Kentucky 2012 is a series of blog posts highlighting how Kentucky workers and families are faring in key indicators of economic well-being including employment, income and wages.

The State of Working Kentucky 2012: Employment

The recession had devastating effects on employment in Kentucky, and the recovery is only gradually lifting the state out of a deep hole. The economy’s collapse drove up the state’s unemployment rate, forced higher levels of part-time work from those who would prefer full-time jobs and led to historically high rates of long-term unemployment.

The length of time that some workers are going without finding work provides an indication of the long-lasting consequences of the recession. Kentucky’s long-term unemployment rate (the share of the unemployed who have been out of work for more than six months) rose from 13.9 percent in 2007 to 36.5 percent in 2011. And while Kentucky’s unemployment rates in recent years are comparable to those in the deep recession of the early 1980s, the state’s long-term unemployment rates from 2009 to 2011 were by far the highest in the past 30 years.

 Long-term unemployment

Source: Economic Policy Institute analysis of Current Population Survey Data

In addition, the underemployment rate was at 15.7 percent in 2011—nearly 70 percent higher than the 9.3 percent rate in 2007. This measure provides a more comprehensive view of the labor market than unemployment as it takes into account workers who have taken part-time jobs to make ends meet but would prefer full-time work; marginally attached workers who would like work but are currently discouraged or are unable to work because of a barrier such as child care or transportation; and those who are unemployed and actively looking for work. The share of unemployed workers who were involuntarily part-time (meaning they would rather have full-time work) in 2011 was 23.1 percent compared to 13.6 percent in 2007.

 Involuntarily Part-time 3

Source: Economic Policy Institute analysis of Current Population Survey Data

Kentucky’s economy is in the beginnings of recovery and the unemployment rate is slowly falling, but many of the state’s workers still struggle to find jobs and to obtain full-time work. Most concerning of all is Kentucky’s persistently high long-term unemployment. These workers risk erosion of skills and further harm to employability if overall job growth doesn’t improve more quickly. Kentucky’s jobless will feel the negative effects of continued high unemployment even more deeply if emergency unemployment benefits for the long-term unemployed are not extended past the end of this year.

The State of Working Kentucky 2012 is a series of blog posts highlighting how Kentucky workers and families are faring in key indicators of economic well-being including employment, income and wages.

Pension Recommendations Emphasize Employee Sacrifice While Addressing Only Portion of Liability

The state’s task force on public pensions heard consultants’ recommendations this week that include several ways to raise employee costs and cut benefits, some of which may not be legal. Yet even if all of the recommendations were to become law they would only reduce a small portion of Kentucky’s unfunded pension liability.

This limited impact and emphasis on employee sacrifice are the results of an approach that includes just one revenue measure (taxing retirement benefits) rather than the kind of broad, long-term revenue plan that is needed to truly address the problem.

The recommendations, which come from the Pew and Arnold foundations, include ideas to refinance the debt, suspend cost-of-living-adjustments (COLA), increase employee contributions, and put more money into the retirement system including through applying income taxes to retirement income. The packages of options presented by the consultants would only address about one-fourth of the unfunded liability.

Public employees would face higher costs under proposals to increase employee contributions by 1 to 2 percent. Their benefits would be reduced through an indefinite suspension of COLAs, the movement of new employees into inferior cash balance or hybrid retirement plans, and the application of income taxes to retirement benefits. But a portion of these proposals could be considered part of the inviolable contract and thus legally protected, including increases in current employees’ contributions and the proposal to tax employee pensions earned before 1998.

The consultants suggest issuing a bond to address solvency in the Kentucky Employee Retirement System non-hazardous plan and potentially save costs on the difference between investment earnings and bond payments. However, the state budget office told Pew and Arnold to expect costs of 6.2 percent on a pension obligation bond—higher than the 4.5 percent cost discussed in earlier task force meetings and the 4.2 percent rate at which Fort Lauderdale, Florida recently issued a similar bond.

The consultants put forward the option of extending the timeline used to pay the existing liability from its current 25 years to 30, a proposal that would actually increase long-term costs to the state.

The other recommendations involve putting more state money into the retirement system. One proposal is to ramp up annual contributions more quickly, yet the consultants do not identify where the funds for those additional payments would come from. Another proposal is to tax retirement benefits—both from public and private retirement income—and dedicate those funds to the pension system.

As we have noted previously, additional state contributions are the only way to truly and fairly address the liability problem. Past legislatures kept state taxes artificially low while not meeting their obligation to employees’ pensions. Not making payments on time has made the debt bigger. The sooner the state identifies resources to dedicate to the system, the smaller the impact of the liability on other state services like education and health.

The proposals that ask employees to make big sacrifices don’t actually make much of a dent in the problem. The proposal for increased employee contributions would reduce the unfunded liability by only about eight percent. Suspending COLAs just keeps the liability from getting bigger. And the proposals for a cash balance or hybrid plan for new employees do not reduce the unfunded liability because their costs to the state are the same as the current defined benefit plan for new employees (but with lower benefits and greater risk for workers).

Employees who haven’t gotten raises for years, made their contributions to the pension system while the state did not, and are undercompensated compared to their private sector counterparts are being asked to give up more in these recommendations. Yet the bulk of the problem is not being addressed in the plan because of its limited new revenue. The longer the legislature waits to address this and other serious resource challenges, the more harmful the impact on the state’s future.