February 13, 2014

Picturing Income Inequality, Part 1

With the increased emphasis on income inequality in both Washington and the media, we are certain to be bombarded with competing partisan and ideological claims about the nature and severity of that inequality. As a political scientist, I'd like to focus on what the data say and in that way hopefully contribute to the civic discourse on the issue. This installment uses data available from the Census Bureau's Current Population Survey (CPS)—one of the key sources of information on income inequality. (For the truly wonkish, I discuss these data in more detail at the end of the post.)

The Bottom Line

The evidence from the CPS data supports the following claims:
  • The richest households have a greater share of income today than they did in 1967; everyone else has seen their share go down.
  • Average household income has increased across the board, but the growth has been unequal and tilted toward the richest households.
  • The top 5% have enjoyed the greatest increase in both share of income and average household income.
  • Consequently, there is greater income inequality in the US today than there was in 1967.

The Evidence

Figure 1 graphs the share of income from 1967 to 2012 for American households grouped into five equally-sized groups (quintiles). Two things are apparent in the figure. First, there is a fair amount of income inequality across those years.* Second, the bottom 80% of American households have seen their share of income decrease, while the richest 20% have seen their share go up.

A more intuitive way to understand income shares is to imagine 100 people who together earned $100. We could divide those 100 people into five groups of 20 (income quintiles). An equal distribution of income would result in each group having $20. The data show, however, that in 2012 the top 20 people had $51 collectively, the middle 20 (middle class) had $14, and the bottom 20 had only $3.

The CPS data also permit us to focus more closely on the the richest households by providing information on the top 5% (calculating the income share for the 15% just below them is straightforward). Both groups saw their share of income steadily increase since 1967, but the greatest growth has been for the richest 5%.

The time series in Figures 1 and 2 therefore show a steady increase in the share of income among the top 20% of households (especially the top 5%) and a steady decrease in the share among the bottom 80%. As a result, we can compare income shares at the beginning and end of the series to get a better handle on the change that's occurred. Figure 3 graphs the endpoints of the time series and calculates net change since 1967.

The share of income at the top has gone up; the share for the bottom 80% has gone down. Going back to the 100 people/$100 analogy, it's as if the bottom 80 people collectively have $7.40 less in 2012 than they did in 1967, with $5.10 of it going to the top 5 people.

A second way to assess income inequality with the CPS data is to look at average household income for each quintile and the top 5%. Figure 4 shows an increase in income (after controlling for inflation) for every quintile, but that the greatest increases are among the rich. Income has grown 88% for those at the top, but only 12% for the lower middle class (the 20-40th percentile). Figure 4 also shows high levels of inequality among American households today. A poor household (those in the bottom 20%) has an annual income around $11,500, a middle class household makes around $51,200, and a typical rich household pulls in $318,100.**

The Census Bureau uses these income data to calculate the Gini coefficient—a summary statistic for the measure of inequality in a population. The coefficient (G) ranges between 0 and 1. It's easy to understand the Gini coefficient with the game Monopoly. At the beginning of the game, each player has exactly the same amount of money—perfect equality (G=0). At the end of the game, one player has all the money—perfect inequality (G=1).

The increasing inequality documented above is apparent in Figure 5. The Gini coefficient has increased 19% since 1967.

The CPS data clearly show that there is greater inequality in the United States today than there was in 1967. Why inequality has increased and whether the federal government ought to do something about it are different questions. In the meantime, I leave you with this.

Technical Information on the CPS Data

The Census Bureau conducts an installment of the Current Population Survey (CPS) each month, primarily to supply the Bureau of Labor Statistics with data on the labor force. In March, the Census Bureau asks an additional set of questions to an expanded sample for the Annual Social and Economic Supplement (ASEC). In 2013, approximately 75,500 households were interviewed (more information here).

The ASEC collects information to assess the total pre-tax resources available to households, including "income from earnings, dividends, and cash benefits (such as Social Security), as well as the value of tax credits such as the Earned Income Tax Credit (EITC) and non-cash benefits such as nutritional assistance, Medicare, Medicaid, public housing, and employer-provided fringe benefits" (Stone et al. 2013, 2).

Although the Census Bureau has data on family income dating back to 1947, it is generally preferable to use the household data that dates back only to 1967 because the Census "defines a 'family' as two or more people living in a household who are related by birth, marriage, or adoption [thereby excluding] people who live alone or with others to whom they are not related" (Stone et al. 2013, 3).

The Census Bureau does not report income over $999,999; if a household makes more than that, it's income is recorded as $999,999. This practice, known as top-coding, is done for privacy reasons; but it has the effect of underestimating income statistics for the rich. Consequently, the CPS data tends to underestimate the level of income inequality.

Stone, Chad, Danilo Trisi, Arloc Sherman, and Chen, William. 2013. “A Guide to Statistics on Historical Trends in Income Inequality”. Center for Budget and Policy Priorities. http://www.cbpp.org/cms/?fa=view&id=3629.

* Income inequality refers to the distribution of income, not the fairness of the distribution. A given particular level of income inequality might be fair and it might not, depending on a variety of factors.

**The CPS data underestimates income figures for the richest households because the maximum income they record is $999,999; households making millions each year are recorded at the just-under-$1m figure. This "top-coding" makes inequality appear less than it actually is.

1 comment: