Declining income is long-term, widespread in Minnesota

In his State of Union address, President Obama noted that one of the most serious problems confronting the nation is growing income inequality. Perhaps the most troubling manifestation of this problem is the real decline in income among middle- and lower-income families. The national problem of declining income is also a Minnesota problem—affecting all regions of the state and commencing well before the start of the Great Recession.

For approximately the last half century, Minnesota median household income has surpassed the national average. However, during the first decade of the current century, Minnesota lost ground to other states on this measure. In 2000, Minnesota median household income was $65,560, compared to the national median of $55,987. Over the next ten years, median household income in Minnesota fell by $7,216 (11.0 percent), while the national median fell by just $3,302 (5.9 percent). By 2010, Minnesota’s median household income was still greater than the national median, although the gap between the two had shrunk considerably.

Median household income represents the income level that divides a population in half, with the incomes of 50 percent of households below the median and the other 50 percent above. Because it is not skewed by extremely high incomes at the upper end of the income spectrum, median household income is a useful way to gauge the income of the typical household. The following analysis is based on real median household income data from U.S. Census Bureau’s American Community Survey (ACS) as compiled by Minnesota Compass for the years 2000 and 2006 through 2012. (Information for 2001 to 2005 is not included in this data set.) All amounts presented below are in constant 2012 dollars.

From 2010 to 2012, Minnesota fortune vis-à-vis the rest of the nation has improved. Over this two year span, Minnesota’s median household income increased by $484 (0.8 percent), while nationally it fell by another $1,314 (2.5 percent). However, both in Minnesota and nationally, 2012 median income remains significantly below the level it was at 2000; in Minnesota median household income had shrunk to $58,828—$6,732 less than it was twelve years earlier; the decline in total U.S. median household income over the same period was $4,616.

Both nationally and in Minnesota, the decline in median household income is not just a product of the Great Recession. Well before the start of the Great Recession, both the Minnesota and U.S. median income was declining (although the decline in U.S. median household income from 2000 to 2008 was slight). The decline in median household income is due to long-term trends—including globalization, automation, and deterioration in collective bargaining rights—that predate the Great Recession and that are not likely to recede simply because the recession is over.

The same median household income trends visible in national and state data are also evident within each of the state’s regions. Minnesota Compass divides the state into seven regions. In all seven regions, median household income is slightly to significantly less in 2012 than it was 2000. The Twin Cities—the region of the state with the highest median household income ($65,768 in 2012)—is also the region with the greatest decline in median income over the twelve year period, both in dollars ($9,934) and as a percentage (13.1%).

In six of the seven Minnesota regions, the median household income decline since 2000 began before the start of the Great Recession and persisted during and after the recession. The one exception to this rule is the West Central region, where a strong agricultural economy, growth in energy production, and spillover prosperity from the North Dakota oil boom contributed to a $1,712 (3.5%) growth in median household income from 2008 to 2012. In all seven regions, median household income declined during the eight years preceding the recession—further proof that the problem of declining median income did not originate with the Great Recession.

This information underscores that growing income inequality is not simply the result of skyrocketing income among the “one percenters.” The problem is not that the incomes of the wealthiest households are growing more rapidly, while the incomes of the less affluent are growing less rapidly. Rather, the problem is that the income of the typical American family is falling as demonstrated by the decline in median household incomes.

Conservative advocacy groups like the Heritage Foundation urge us not to worry about income inequality, but rather to focus on growing the economic pie so that everyone benefits. However, this recommendation overlooks the fact that the economic pie—as measured by real per capita GDP—has grown since 2000, yet the median income of U.S. and Minnesota households has fallen. Growing the pie won’t help the typical Minnesota or American family if their slice of that pie is shrinking faster than the total pie is growing.

The economic pie will grow faster if working families are able to get a bigger piece of it. The backbone of the U.S. economy is middle class consumer demand. When the income of middle class increases, consumer demand increases, which in turn will spur business and job expansion and robust and sustainable economic growth. As Paul Wellstone said, “We all do better when we all do better.” If, on the other hand, median household income continues to decline, consumer demand will decline, and the state and national economy will limp from recession to recession, punctuated only by lackluster recoveries.

The problem of income inequality is ominously manifested by the decline in real median household income—a trend that is both long-term and widespread, persisting through two economic recoveries and affecting the nation, state, and every region within the state. These trends—and the pernicious economic consequences that they spawn—will likely continue until state and national policymakers make a concerted effort to reverse them. Increasing the minimum wage and—beyond that—strengthening collective bargaining rights would be a good place to start.

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    Jeff Van Wychen's picture
    Jeff Van Wychen

    Jeff Van Wychen is the fiscal policy fellow at Minnesota 2020.