California Grapples With Growing Income Gap

The state's widening divide between rich and poor outpaces the nation's

It's been hailed as "Siliwood" - the synergetic mix of Silcon Valley and Hollywood. The rise of this California high-tech job machine is heralded as marking the end of eight hard years of recession. The state now has a hefty budget surplus and boasts falling unemployment figures.

But this economic revival belies a trend with long-term social and political consequences: The gap between the rich and poor in the Golden State is far outpacing the nation as a whole.

To some economists it represents a dangerous stratifying of the economy between the haves and have nots.

"The technological elite are doing extremely well," says Larry Kimbell, director of UCLA's Anderson Business Forecasting Project. "The spectacular wealth is causing a tremendous sense of anxiety because it's from a process most of us aren't involved with and that uses a very specialized set of skills."

But to others, it's a temporary phenomenon that continued economic growth will correct.

Either way, the strains that gap puts on California's criminal justice, welfare, and educational systems are clear. How the state copes with the income disparity will be closely watched by public officials elsewhere.

"California represents a microcosm of the rest of the nation...all the factors that are driving wage erosion and income inequality just jump out at you," says Jared Bernstein, a labor economist at the Economic Policy Institute in Washington.

Income disparity has been increasing in nearly every region of the country since the 1970s, with California in the lead. As early as 1987, income inequality here rose more sharply than the national trend due to a drop in income for the poor, says a recent study by the Public Policy Institute of California, a nonpartisan San Francisco think-tank.

From 1976 to 1994, inflation-adjusted household income among the poorest 10 percent of Californians fell 30 percent, compared with an 8 percent decline nationally. A study by the Sacramento-based California Budget Project found nearly 1 in 5 Californians live below the poverty line, a 63 percent increase since 1980. And incomes for low-skilled male workers have dipped: In 1969, 20 states had more inequality in men's earnings than California. By 1989, only Texas and New Mexico did.

While wage and job growth here currently lag the national rates, some observers say it is only a matter of time before economic growth lifts prospects and incomes for all Californians.

But others argue that a fundamental change has occurred. "What makes the 1990s different is that economic growth no longer seems to lift all boats," says Jean Ross, executive director of the California Budget Project in Sacramento. "No longer when the economy expands do you see people at the bottom income level benefiting proportionately."

The problem and the solution go back to education, according to Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. He says the decades-long decline in wages and jobs for high-school-educated men is the primary reason for the income gap in California and nationwide. Meeting this educational "challenge within prosperity" is the state's responsibility, he says. Federal job-training programs have generally failed. "It's very important that California knows ... the responsibility for solutions falls on it more than ever before," Mr. Levy says.

The California Budget Project suggests strategies to reduce poverty that have been tested in other states. These include supplementing the wages of low-income working families with a state earned income tax credit; increasing minimum wages; and improving access to health care, child care, and education.

But other economists say widening income inequality cannot be counteracted by individual state policies because the forces behind the trend are so widespread.

"It's very hard for a state all on its own to do much about income distribution," says Gary Burtless, an economist at the Brookings Institution in Washington. "It will swim against a very heavy tide."

Factors widening the income gap, say economists, include competition from low-wage countries and technology, an erosion of the minimum-wage purchasing power, and the decline of unions and collective bargaining - which have widened the wage gap between blue- and white-collar workers. Analysts also say more recent trends indigenous to California - the decline of the defense industry and a tide of immigrants willing to work for low wages - may have magnified that gap relative to the rest of the nation.

Mr. Bernstein of the Economic Policy Institute sees answers in national and state legislation. He says stronger unions, a higher minimum wage, employer-provided health insurance, and the revamping of US trade policy to block low-wage competition are all needed to stem the growing income gap. "The gutting of these labor market institutions have not led to efficiency gains, but only to great distribution shifts in wages and income and wealth," he says.

But Lynn Karoly, a senior economist at RAND, says, "The US has always lived with economic disparity. The question is, how much are we willing to live with? We need to figure out how to support and provide a safety net for the least fortunate, those who are caught up in circumstances beyond their control, and cushion them from the consequences of the changing economy."