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Income gap grows in U.S.

Incomes are growing smartly for the first time in years, spurring unexpectedly robust spending by consumers. The revival, however, is mainly among top earners who receive stocks, bonuses and other income in addition to wages.

The nearly 80 percent of Americans who rely mostly on hourly wages barely maintained their purchasing power, according to the Labor Department. Raises have been meager, averaging about 2.7 percent in the past year -- a tad above the 2.5 percent inflation rate.

Incomes are up a more robust 7.5 percent when bonuses, stock compensation, commissions and other wage supplements are added, according to the Commerce Department.

Most of the boost, though, is felt by those at the top end of the income scale.

Federal Reserve Chairman Alan Greenspan expressed concern in testimony earlier this month about the disparity between wage-earners and high-income executives and professionals, which by some measures is the biggest in the United States since the Roaring '20s.

The Fed chairman, who frequently is asked about the problem in congressional hearings, attributes the disparity to diverging education and skill levels between the nation's top earners and those at the middle and bottom of the income scale.

"I think it's a very disturbing trend," Mr. Greenspan told the Senate Banking, Housing and Urban Affairs Committee. "It is a reflection, as best I can judge, of a faulty educational system in the United States. As you know, we've got relatively poor marks internationally, especially as our students move from the fourth grade to the 12th grade."

Mr. Greenspan is not alone in concern about the inadequate educations that diminish opportunity for many American workers and open a growing income gap.

He is joined by major businesses organizations and prominent individuals, including Microsoft Chairman Bill Gates and former General Electric Chairman Jack Welch, who are putting time, money and effort into doing something about it.

The failure of the American educational system to ensure that children in middle school and high school are taught the math, science and technological skills they need to get good-paying jobs is at the root of the problem, Mr. Greenspan and others say.

Japan and Europe -- where income disparities are not so large -- and even developing countries such as China, India and Russia are producing many times the engineers and technicians produced in American universities, they note.

Good-paying jobs -- whether in computers, health care or basic industries, such as energy and machinery -- increasingly require a strong grasp of math and science and sophisticated technological skills.

Students who graduate without those or other specialized abilities end up competing for a dwindling number of unskilled or low-skilled jobs, driving down wages for those positions, Mr. Greenspan noted.

To make matters worse, many of the lesser-skilled jobs once available in manufacturing and other areas are migrating overseas to countries where wage levels are far lower.

The disparity has become so acute, Mr. Greenspan said, that shortages are emerging in many high-skilled professions -- driving up income for the most-sought-after workers -- even as the majority of Americans continues to experience depressed wages.

Bonus payments, commissions, stock options and other incentive income surged in the past year even as lower-skilled workers struggled to keep up with the rising cost of gasoline, health care and education.

"I'm concerned about this. It's a major issue in this country," said Mr. Greenspan, who has announced he will retire in January.

"A free-market, democratic society is ill-served by an economy in which the rewards are distributed in a way" that leaves out the majority, he said. "Too many of our population ... don't feel the advantages and benefits coming from the system."

That Americans are disaffected by the growing income gap can be seen in public opinion polls. A survey this month by Public Opinion Strategies and National Public Radio found that 53 percent have a negative opinion of the economy, citing reduced job benefits, rising costs and exported jobs.

Homes pack punch

While many Americans feel left out of the growing income trend, Mr. Greenspan noted, middle-income families found another way to supplement their wages, at least for a time, and they're using it heartily.

About 70 percent of Americans own their homes, and the rapidly rising value of their houses -- up 15 percent on average nationwide in the year ending in June -- provides homeowners with a financial cushion they can use to spend and save.

By tapping into growing values through home-equity loans and cash-out refinancings, middle-class Americans have been able to add mightily to incomes -- sometimes doubling their wages in one year, economists say.

The benefits from the housing boom were cited by voters in the opinion poll as one of two positive factors in today's economy, along with low interest rates.

But as Mr. Greenspan pointed out, the cash gained from home sales and refinancings is not, strictly speaking, income. Rather, it is a form of capital gains, and to the extent it is financed with mortgage loans, it is debt that must be repaid.

Furthermore, home prices cannot be relied upon to keep shooting up each year or to be a dependable source of income. Price declines are likely in markets driven by "speculative fervor," he said, and some will see part of their financial windfall wiped out.

Moreover, for the nearly one-third of Americans who rent but would like to own homes, spiraling house prices have worsened the pinch they feel from stagnant wages. This makes the possibility of homeownership seem remote while raising the cost of renting.

"In a weak labor market, many renters spend more of their incomes on paying their rents," said Jay Heidbrink of the Center for American Progress, a liberal think tank. "This has put many renters, who are disproportionately lower-income families, in a bind."

Windfall benefits

The revived income for top earners and asset-rich homeowners bolstered the economic expansion and produced some pleasant surprises.

Economic growth showed more strength this year than many forecasters anticipated. But in perhaps the most visible dividend, the federal and state governments have enjoyed an upsurge in revenue from income taxes that helps to reduce large debts and budget deficits.

The Commerce Department recently reported about $270 billion in previously undetected income in the past half year, much of it from bonuses and stock options taxed at the highest rates of more than 30 percent. The resulting tax windfall is expected to shrink the federal deficit by as much as $100 billion this fiscal year.

That kind of revenue-driven improvement hasn't been seen since the mid-1990s, when burgeoning incomes fed by the booming stock market produced a surge in revenue. The big windfall not only balanced the federal budget, but also briefly produced large surpluses.

The reason the government benefits when the well-to-do are prospering is because the progressive tax system ensures that upper-income taxpayers foot a disproportionate share of the nation's income-tax bills.

According to the Internal Revenue Service, the top 25 percent of taxpayers -- those earning above $56,401 a year -- pays 84 percent of federal personal income taxes, while the bottom half -- those earning less than $28,654 -- pays 3.5 percent.

The surge in income growth among top earners is corroborated by private studies, including one by Spectrem Group, a market research organization that found that the number of U.S. households with a net worth of $1 million or more increased by 21 percent last year to a record 7.5 million. The jump occurred even as median household income held at about $43,000.

In the Washington area, the number of millionaires increased 10 percent last year to 82,376, even when the value of real estate assets is excluded from wealth holdings, according to a survey by Merrill Lynch and Cap Gemini Ernst & Young.

"The U.S. economy has been generating stable growth, rising incomes and powerful increases in household wealth," said Roger M. Kubarych, economist with HVB Group.

Not wages alone

Robust income gains fueled a revival of spending on air travel and hotels, retail sales and some off-the-chart months at auto dealerships, in addition to record levels of spending on the most expensive purchase of all -- homes.

The housing boom contributes in another way to the surge in income growth: Bonuses, wages and commissions at real estate and mortgage-finance firms are brimming over.

By some estimates, housing-related industries produced about one-third of jobs created since the 2001 recession, and income growth in those fields has been spectacular, economists say.

The prominence of the real estate industry in today's economy, where income is driven by commissions and bonuses, is one of many reasons that hourly wages have come to constitute a shrinking share of household income, noted John Silvia, chief economist at Wachovia Securities.

Since 1975, wages fell from 62 percent to 56 percent of income, he said. Income grew from sources such as businesses, investments and one-time payments from bonuses, commissions and stock options.

The one-time payments -- usually supplements to wages -- enable workers to share in good times when profits are growing, as they have since 2002.

But workers increasingly are exposed to the darker side of the business cycle when profits -- and one-time income payments -- decline.

Another trend contributing to the surge in incomes is the growing army of workers who hire themselves out as independent contractors rather than join company payrolls, Mr. Silvia said.

Self-employed workers earn a growing share of the nation's income, he said, and their good fortunes in the past year can be seen in the 10 percent rise in business proprietors' incomes recorded by the Commerce Department.

Immigrant workers -- many of whom are undocumented and prefer to work independently -- are a disproportionate share of the self-employed work force, he said.

Small business hurts

In the latest sign that the ranks of immigrant contractors are burgeoning, the IRS last year issued 900,000 taxpayer identification numbers to workers without Social Security numbers.

Those tax ID numbers mostly are sought by illegals, Mr. Silvia said, and about 8 million of the numbers have been issued since 1996.

The growing ranks of independent contractors has another downside: Small businesses, which for decades have been the engine of U.S. job growth, in recent years increasingly replaced hourly and salaried workers with contractors.

One result has been a drop in salaries at small firms, said Michael Alter, president of SurePayroll, a tax- and wage-form preparation service for small businesses.

Pay at small companies declined by 4.8 percent last year, he said, and is running close to that rate this year.

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