Study: Blue states have the income-inequality blues

MoneyRates.com Senior Financial Analyst, CFA
March 10, 2014

It is no surprise that President Obama should be keenly aware of income inequality: He has to look no farther than his own neighborhood to find the most extreme case of it, according to a new study by MoneyRates.com.

The study finds that Washington, D.C. has a greater degree of income inequality than any of the 50 states, and that the states that voted for Obama in 2012 suffer more from income inequality than those that voted for Mitt Romney. However, the study's findings also raise questions about whether a higher level of income inequality is actually a bad thing.

The gap between rich and poor

MoneyRates.com looked at income inequality in all 50 states, plus the District of Columbia, by using the most recent annual wage data from the Bureau of Labor Statistics, as well as data from the previous 10 years in order to measure changes.

Rather than examining outliers -- such as the salaries for the very richest or very poorest workers -- MoneyRates.com focused its measures on income inequality on a comparison between wages at the top 25th percentile and wages at the bottom 25th percentile. The intent here was to capture a gap that's affecting a broad range of workers.

The central figure computed was the ratio between top 25th and bottom 25th percentile wages. The change in this ratio over the 10-year period of the study shows where the gap between rich and poor is widening the most, and where it is narrowing (which is rare).

These figures were then used to look at how income inequality looks in states that voted for Obama in 2012 (blue states) and those that voted for Romney (red states). Finally, the degree of income inequality was compared to median wages and wage growth overall, to see whether the average worker is better or worse off in states with a high degree of income inequality.

Where income inequality is greatest

The ratio between the top 25th percentile and bottom 25th percentile incomes is greatest in Washington, D.C., where high incomes are 2.6 times low incomes. To put some actual numbers on that, high-income workers in D.C. earn $102,980 per year, while low-income workers earn $36,690. The gap is narrowest in South Dakota, where high incomes are 1.89 times low incomes. There, high-income workers earn $41,580, compared to $21,580 for low-income workers.

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You may notice that both numbers are considerably higher in Washington, D.C., and this holds true even when they are adjusted for inflation. That raises the question of whether income inequality is actually such a bad thing for most workers, but there's more on that below.

For now, here is a list of the states (plus Washington, D.C.) with the greatest income inequality:

State or District

High income/low income

1. Washington, D.C.

2.60

2. California

2.55

3. New York

2.50

4. New Jersey

2.45

5. Michigan

2.43

6. Illinois

2.41

7. Texas

2.40

8. Louisiana

2.38

9. Maryland

2.38

10. Virginia

2.38

At the other end of the scale, here is a list of states where incomes are the most equal:

State or District

High income/low income

1. South Dakota

1.89

2. Maine

2.01

3. Vermont

2.02

4. Arkansas

2.04

5. Mississippi

2.07

6. North Dakota

2.07

7. Iowa

2.07

8. New Hampshire

2.07

9. South Carolina

2.08

10. Nebraska

2.09

There is no doubt that income inequality is growing in the U.S. In the 50 states plus the District of Columbia, income inequality increased by an average of 6.43 percent over the past 10 years. The gap widened the most in Maryland, where it grew by 12.05 percent. Only two states saw the gap actually narrow, led by Wyoming where it narrowed by 3.11 percent.

Check the map below for a state-by-state breakdown of inequality ratios (high income/low income) and their rate of change over the past 10 years.

Washington Idaho Montana North Dakota Minnesota Wisconsin Michigan Oregon Wyoming South Dakota Iowa Illinois Indiana Ohio California Nevada Utah Colorado Nebraska Kansas Missouri Kentucky Arizona New Mexico Texas Oklahoma Arkansas Louisiana Mississippi Tennessee Alabama Georgia Florida West Virginia Maryland Pennsylvania New York Vermont New Hampshire Maine Massachusetts Rhode Island Connecticut New Jersey Delaware Virginia North Carolina South Carolina Alaska Hawaii Washington DC DE VT NJ RI CT NH MA MD DC

Red state vs. blue state

Income inequality is one of many issues on which Republicans and Democrats disagree. Philosophical differences aside, one reason why the two parties may see this issue from different sides is that their voters experience income inequality to different degrees. Income inequality is worse in blue states, and has also grown more quickly in those areas over the past 10 years.

In blue states, the average ratio between high and low incomes is 2.27, compared to 2.18 in red states. What is more striking is the difference in how rapidly the income gap has grown over the last 10 years. In blue states, the ratio between high and low incomes has grown by 7.74 percent, compared to 4.96 percent in red states.

This is not to say that Democratic policies worsen income inequality while Republican ones level the playing field. After all, not all states that voted for Obama necessarily have Democratic leadership, and in some cases the party in power has changed hands over the past decade.

What the figures do help explain is why Democrats may be more sensitive to this issue than Republicans, since people in states who supported Obama are experiencing more income inequality than people in other states.

Is income inequality actually good for most people?

The expression "income inequality" implies some form of injustice, but differences in income are a natural condition of a capitalist society. After all, some people work harder than others, and some add more value to their employers than others. Some argue that the incentives created by income inequality make the economy more dynamic, and there is some support for that argument in the study's numbers.

Median incomes, adjusted for the differing costs of living in different states, tend to be higher in states with the biggest gaps between high and low incomes. So, while upper-income people may be benefiting the most in those states, the average worker is also better off in those states than in places with smaller income gaps.

On the other hand, looking at changes over the past 10 years suggests this advantage may be fading. Median incomes have grown more slowly in states where the income gap has been increasing most quickly.

Ultimately, what these figures seem to suggest is that a reasonable degree of income inequality is actually good for a state's prosperity, but that if income inequality rises too quickly, it starts to leave the average worker behind.

Your responses to ‘Study: Blue states have the income-inequality blues’

Showing 2 comments | Add your comment
felipe manteiga

11 March 2014 at 2:45 pm

Return to capital, a difficult term. Some states have been investing heaily on human and physical capital (roads, ports, security, education, health) while others, tending to have no state income tax, might have been decapitalizing (many universities in the South have significant low gradution rates, for example). Returns to capital is impoirtant, and in an expanding economy, outstrips return to labor. But when one considers the massive capital invested by the state of New York or Illinois, question surface: who captures those returns and why? If they go to those with more capital, financial, physical, human or political, then larger inequality will follow. In general, and around the world, one finds polarized incomer distribution makes the growth segment in teh cycle more shallow and fragile. In contrast, those with better distribution, tend to be longer and deeper I would like to read more on the methodology followed for this esurvey--using as key parameters the top and bottom 25% could, statistically,mask a multitude of sins.

Karl Bonner

11 March 2014 at 2:06 am

Since the surge of income inequality over the past 40 years mainly manifests at the very top, one may ask whether differences of inequality between states have to do with states having a relatively larger and smaller share of the nation's rich people living in them. Apparently rich people must find it advantageous to live in those states that happen to also be blue - states like California and New York and Massachusetts. I think the underlying division is really more a rural vs urban one. Urban areas tend to be economic hubs and produce lots of business activity and lots of wealthy residents - and lots of income inequality. But these places also tend to be cultural hubs, which ends up pushing the politics in a liberal direction. (I bet these states would be even more unequal if their state and local governments didn't lean progressive in their policymaking!) Also the same parochial culture that pushes rural politics rightward, also means a less educated and enlightened population, and one that is less capable of providing practical skills in a modern economy. That means less investment there, and fewer rich people.

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