Bloomberg News

Fed Says U.S. Inequality Rose to Record Even With Redistribution

February 24, 2012

Feb. 21 (Bloomberg) -- Inequality of earnings in the U.S. rose to a postwar high even as transfers of wealth, such as unemployment benefits, reached a record in 2010, according to the Federal Reserve Bank of Minneapolis.

“The bottom 20 percent of the U.S. population has never done so poorly, relative to the median, during the whole postwar period,” Fabrizio Perri and Joe Steinberg wrote in a paper released today by the Minneapolis Fed. “Low-earning households have become, during the course of the Great Recession, more vulnerable due to large losses in wealth.”

President Barack Obama has made inequality a rallying point for his re-election campaign, calling for legislation to raise taxes on millionaires after Congress extended a temporary payroll tax-cut for workers.

“My message to Congress is, don’t stop here. Keep going,” Obama said today of the payroll-tax cut at an event meant to highlight U.S. workers who will benefit.

The Senate and the House of Representatives cleared the $145 billion payroll package on Feb. 17, and the White House said Obama plans to sign it into law this week.

Money earned by the bottom 20 percent of U.S. households fell by about 30 percent compared with the median during the recession as workers lost their jobs or decided to leave the labor market, according the Minneapolis Fed study.

After Paying Taxes

Households that were in the bottom 20 percent of earnings in both 2006 and 2008 experienced a $159 decrease in disposable income, or money available after paying income taxes, said the Minneapolis Fed’s Perri, a consultant, and Steinberg, a research analyst. Those that moved into the bottom quintile from a higher-earning category had $12,236 less to spend in 2008 than in 2006, the study found.

“Although government redistribution policies -- taxes, unemployment insurance and others -- have provided an important cushion against the effect of earnings declines on disposable income and consumption, they have not fully shielded households’ disposable income from these earnings fluctuations,” Perri and Steinberg said.

“This further suggests that the Great Recession could have indeed had major redistributive effects at the bottom of the distribution,” they said.

The payroll tax measure, in addition to extending a two- percentage-point tax reduction for workers, will continue expanded unemployment benefits and avert a cut in doctors’ Medicare reimbursements through the end of this year. The provisions would have expired at the end of the month if Congress hadn’t acted.

--With assistance from Margaret Talev and Roger Runningen in Washington. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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