While the Top Three Percent of Wage Earners Get Richer, New York City’s Low Wage Workers Risk Greater Poverty.
The top three percent of wage earners in New York City experienced a significant wage growth of nine percent in 2024, diverging further from both middle and low-income workers, exacerbating income inequality.
The Covid-19 pandemic amplified income inequality, with the top three percent seeing a 34.5 percent increase in real wages between 2019-2024, compared to slower growth for low and middle-wage earners.
High-wage sectors such as finance, tech, and information, where the top three percent work, saw strong wage growth, while low- and middle-wage industries struggled with stagnant wages.
The City should consider proposing a new additional high-income tax bracket to its local income tax to cushion against the proposed federal spending and tax cuts that will benefit the wealthiest households and further harm low-income households in New York City.
The Rise of New York City’s Top Three Percent
Real hourly wage growth in New York City slowed down across the wage distribution in New York City and nationally from 2023 to 2024 in comparison to the previous two years. This is also happening nationally, as corroborated by the Atlanta Fed’s Wage Growth Tracker. However, in the city, the top three percent of wage earners represented a notable exception. This group is composed of workers whose real wage in 2024 was at or above $312,000 a year before taxes. The average real hourly wage of this group increased by nine percent in 2024, going from $175 in 2023 to $190 in 2024. The top three percent of wage earners are not only diverging from the bottom and middle wage earners; they are also separating from the rest of the top 20 percent of the wage distribution.
In our October 9, 2024 report, my colleagues and I showed that wage inequality between the top and bottom 20 percent of wage earners increased in New York City during 2019-2023, while it decreased in the rest of the U.S. We also showed that the city’s middle-wage workers recorded the slowest wage growth during the same period, adding to four decades of income polarization in New York. The further divergence of the top three percent is further evidence that the benefits of our economy’s growth have been moving towards a narrow group of wage earners and industries.
Figure 1.
In a period of five years, wages in the top three percent grew more than four times faster than wages in the bottom 20 percent of the wage distribution, and far outstripped wage growth for other workers, too.
Figure 2
The 2019-2024 period may actually constitute a golden age for the top three percent. As Figure 2 shows, when looking at different time periods, wages in the top three percent experienced their highest annual growth rate in 2019-2024 at 6.1 percent compared to 2.9 percent in 2013-2019 and 1.3 percent in 1996-2013. In contrast, for the rest of the wage groups – with the exception of the upper-middle group – their highest real wage growth was in 2013-2019, when the city’s economy was nearing full employment and the minimum wage significantly increased.
Most economists agree that technological advancement and globalization have both widened the income and job gap between low-wage and high-wage workers in the U.S. However, a good share of low-wage jobs is hard to export abroad because they require face-to-face interactions, particularly in the health sector (e.g., nursing and residential care facilities). This explains why wages and jobs in these groups in New York City have been protected against the delocalization effect of globalization – when employers decide to move their production sites abroad, where wages are lower, and shut down their U.S. sites. This contrasts with middle-wage industries where many jobs in manufacturing, construction, and administrative support have been destroyed in addition to recording minimal or negative wage growth. Covid-19 accelerated the effect of technological change and digitalization, which contributed to the job and income boost high-wage workers experienced in the city.
Table 1
The top three percent of wage earners tend to work in industries that benefited from globalization and technological advancement, such as the information, tech and financial sectors. As Table 1 shows, information services recorded a 28.8 percent increase in its average real wage, followed by computer systems design and related services at 17.1 percent, scientific research and development at 16.7 percent, computer and electronic product manufacturing at 12.4 percent, and security and commodity investment activity at 1.4 percent. This strongly contrasts with the 0.6 percent average wage decrease in the low-wage industries and the stagnant wage growth in middle-wage industries.
Strong State and Local Tax Policy to Cushion Federal Regressive Tax Cuts
The significant increase of the top three percent’s wages in New York City severely contrasts with the increase in poverty and child poverty as well as the growing demand for cash benefit assistance the city has been experiencing. Increasing taxes on the top three percent wage earners at the local level for redistributive purposes is warranted, especially in light of an anticipated combination of forthcoming federal tax cuts for the wealthiest households and spending cuts that will primarily harm low-income households.
Congress and President Trump are expected to extend the expiring provisions of the 2017 Tax Cuts and Job Act (TCJA), which will not only benefit the wealthiest households but will also likely increase the U.S. fiscal gap (the amount of money realized through taxes or spending cuts to stabilize public debt) and harm low-income households. This week, the Republican majority in the House narrowly approved a budget that proposes cuts of about $880 billion from Medicaid over the next 10 years, in order to fund the tax cuts provided in the TCJA. While the tax cuts will principally benefit those with the highest incomes, Medicaid cuts, if enacted, would disproportionally harm and reduce the income of the bottom 40 percent of the country.
Extending the TCJA would certainly allow New York City’s top three percent of wage earners to realize additional savings in federal taxes, while the cuts in Medicaid will push further low-income households into poverty or near-poverty, increasing the pressure on the City’s budget.
This represents an opportunity for the City to tax that income category to help cushion federal spending cut impacts on low-income households. However, the current proposals around personal income tax policy at the State and City levels focus on reducing rates in the five lowest personal income tax brackets. Yet, this policy change is estimated to lower State tax revenues by $450 million in the 2025-2026 fiscal year and by $1.0 billion in 2026-2027. In contrast, my colleagues and I suggested in our New York City’s 2025 Economic and Budget Outlook that the city’s personal income tax structure needs to be redesigned to generate additional tax revenues. By adding two new high-income tax brackets of $1 million to $5 million and $5 million and up, with rates of 4.2 percent and 4.4 percent, respectively, the City could generate up to $1 billion annually in new revenue.
Given the regressive direction that federal fiscal policy is taking, a greater expectation to reduce income inequality will be placed on the Fed’s monetary policy. Lower interest rates boost private investment which results in higher job creation. It also eases the borrowing conditions for households. Both these channels tend to reduce income inequality by providing additional income opportunities to low- and middle-wage households. However, the Federal Reserve warned in its latest Monetary Policy Report, that while the economy showed signs of solid growth and strong labor market conditions in 2024, inflation remains resistantly high and has not met the Fed’s two percent target yet. This makes achieving its dual mandate of full employment and stable prices challenging. A high-interest rate environment added to the federal spending cuts is more likely to harm low and middle-income households and further amplify job and income polarization in the city.