Why Income Inequality Hurts Kids and Families

Posted March 11, 2014, By the Annie E. Casey Foundation

Blog whyincomeinequalityhurtskidsandfamilies 2013

The Amer­i­can Dream – the idea that any­one who is deter­mined and works hard can get ahead – has long defined the promise of the Unit­ed States. Yet the real­i­ty is that life chances for Amer­i­cans are now deter­mined to a sig­nif­i­cant degree by the wealth of our par­ents. The dream that hard work and play­ing by the rules will lead to greater oppor­tu­ni­ty and a steady climb up the eco­nom­ic lad­der is increas­ing­ly chal­leng­ing to achieve, par­tic­u­lar­ly for strug­gling families.

When the already rich are the prime ben­e­fi­cia­ries of eco­nom­ic gains, the play­ing field is clear­ly not lev­el, dimin­ish­ing the chances of eco­nom­ic mobil­i­ty for the most dis­ad­van­taged. Eco­nom­ic inequal­i­ty in the Unit­ed States is now at its high­est lev­el in near­ly a cen­tu­ry. Our coun­try has the most unequal dis­tri­b­u­tion of income and wealth of all devel­oped nations. For those who earn low wages and have few to no assets, nar­row­ing path­ways to the mid­dle class and dimin­ished hopes of get­ting ahead threat­en the well-being of mil­lions of low-income fam­i­lies and their children.

The Grow­ing Divide

For three decades after World War II, low- and mid­dle-income fam­i­lies saw their incomes grow as the over­all econ­o­my grew. Income growth was strong and broad­ly shared. But since the late 1970s, except for a brief peri­od in the 1990s, the incomes of ordi­nary fam­i­lies have diverged from the econ­o­my as a whole: Most income gains have gone to high earn­ers, while incomes for mid­dle- and work­ing-class fam­i­lies have stag­nat­ed or declined. In 2011, 48% of income went to the top 10% of earn­ers and 19% of income went to the top 1%; in com­par­i­son, the top 1% took home 8% of total income in the 1970s. The coun­try has not expe­ri­enced this lev­el of income inequal­i­ty since the 1920s.

The wealth gap is far stark­er than the income gap. The top 1% own 40% of the nation’s finan­cial wealth, while the bot­tom 80% own only 7%. Over the last 30 years, the bot­tom 60% of the pop­u­la­tion has seen their wealth decline, while the top 5% has grown increas­ing­ly rich­er. Wealth inequal­i­ty con­tin­ues to grow and has been exac­er­bat­ed by the uneven eco­nom­ic recov­ery. Fur­ther, dis­par­i­ties in finan­cial wealth are a prime fac­tor per­pet­u­at­ing racial and eth­nic inequities.

Stag­nant Eco­nom­ic Mobility

Despite the myth of eco­nom­ic mobil­i­ty in Amer­i­ca, fam­i­lies face the real­i­ty that inter­gen­er­a­tional eco­nom­ic mobil­i­ty has not changed much over the last 40 years. If any­thing, it has declined. Chil­dren born to fam­i­lies at the low­er end of the income scale have a par­tic­u­lar­ly hard time improv­ing their eco­nom­ic posi­tion rel­a­tive to their par­ents. In fact, mobil­i­ty in the Unit­ed States has become so stag­nant; it’s low­er than in Cana­da and many Euro­pean coun­tries, includ­ing the Unit­ed King­dom, Ger­many and France.

In the Unit­ed States, chil­dren born to par­ents in the low­est fifth of the income scale are quite like­ly (42%) to end up there as adults. Sim­i­lar­ly, chil­dren of par­ents in the high­est-income group are very like­ly to stay there (39%). Upward mobil­i­ty has proven par­tic­u­lar­ly dif­fi­cult for African-Amer­i­can fam­i­lies to sus­tain. Ful­ly 45% of black chil­dren whose par­ents were solid­ly mid­dle-income end up falling to the bot­tom of the income dis­tri­b­u­tion, com­pared with only 16% of their white peers.

The wealth gap is one rea­son African-Amer­i­can fam­i­lies are more vul­ner­a­ble to down­ward mobil­i­ty: white and black fam­i­lies of sim­i­lar income lev­els have vast­ly dif­fer­ent amounts of wealth. With­out finan­cial assets, it’s dif­fi­cult for fam­i­lies to bounce back after a cri­sis and to sus­tain hard-won gains from one gen­er­a­tion to the next.

Fam­i­lies Need Assets to Invest in Their Kids

While a basic lev­el of income enables par­ents to pro­vide for their children’s day-to-day needs, assets — such as sav­ings, home equi­ty, life insur­ance and stocks and bonds — allow par­ents to offer their chil­dren a bet­ter future. Research shows that fam­i­ly assets (defined as total net worth and liq­uid assets such as sav­ings and mutu­al funds) pos­i­tive­ly impact aca­d­e­m­ic achieve­ment in grade school, as well as col­lege atten­dance and completion.

Assets improve out­comes for chil­dren in sev­er­al ways. By help­ing fam­i­lies weath­er tem­po­rary eco­nom­ic hard­ships, such as job loss or high med­ical bills, sav­ings and oth­er liq­uid assets reduce par­ent stress and may improve par­ent­ing. Assets also give par­ents the finan­cial means to invest in their children’s edu­ca­tion. In addi­tion, sav­ings and asset accu­mu­la­tion rein­force and may help cre­ate a more for­ward-look­ing, future ori­en­ta­tion in par­ents and chil­dren alike. In short, help­ing fam­i­lies accu­mu­late assets can increase their long-term finan­cial sta­bil­i­ty, improve eco­nom­ic mobil­i­ty and bol­ster children’s chances for suc­cess regard­less of race or ethnicity.

Popular Posts

View all blog posts   |   Browse Topics

Mental health is a pressing issue for Generation Z

blog   |   March 3, 2021

Generation Z and Mental Health