December 18, 2013

The many ways to measure economic inequality

From President Obama down to local minimum-wage ordinances, issues of economic inequality have been pushing their way back into the national conversation — particularly among Democrats. In a Bloomberg survey earlier this month, 71% of Democrats said the government should work to narrow the gap between rich and poor, while 68% of Republicans said the government should stand aside and let market forces operate freely.

econDistributionBut economists disagree on just how much inequality there is and how best to measure it. As Federal Reserve economist Arthur Kennickell wrote in a 2009 paper, ” ‘[i]nequality’ may seem a simple term, but operationally it may mean many different things, depending on the point of view.” Most researchers agree that wealth is much more unevenly distributed than income, while consumption is less concentrated at the upper end than either wealth or income.

Probably the most-familiar inequality measures involve income. The Census Bureau annually publishes two measures of income inequality each year; according to the most recent report, the top 5% of households received 22.1% of “equivalence-adjusted” aggregate income last year — nearly as much as the bottom 60% of households (27.2%). (The “equivalence-adjusted” estimates adjust for different household sizes and compositions.)

econInequality_revisedThe Census Bureau also reports the Gini index, a summary statistic that measures the dispersion of incomes on a scale of zero (everyone has exactly the same income) to 1 (one person has all the income). The income Gini for the U.S. has been rising for decades: On an equivalence-adjusted basis, the Gini was 0.362 in 1967 and 0.463 last year. (Other economists, such as Berkeley’s Emmanuel Saez, have tracked income inequality over long periods using somewhat different measures and reached similar conclusions.)

But some economists say that income data have too many flaws to be the primary measure of inequality. For one thing, most income-inequality measures use income before taxes and transfer payments (such as Social Security, food stamps and unemployment benefits), which act to reduce inequality. According to the Organization for Economic Cooperation and Development, taxes and transfers cut the United States’ income Gini from .499 to .380 (although that latter figure still is among the highest in the developed world and also has risen over time).

Other researchers note that an individual’s (or household’s) income can vary considerably over time, and may not reflect all the economic resources available to them — such as credit availability, government assistance or accumulated family wealth. They argue that consumption is a better measure of economic well-being.

Such studies typically find that consumption inequality is less than income inequality, though still significant. A 2012 study from the American Enterprise Institute, using data from the Consumer Expenditure Survey, found that the top 20% of households by income accounted for nearly 40% of total expenditures, while the bottom 20% accounted for less than 10% of expenditures. As the chart shows, the gap between the top and bottom has remained relatively constant — a finding that echoes those of other consumption-oriented researchers.

FT_AEI

But other economists have looked at consumption data and reached different conclusions. One recent study, prepared by two U.S. Census researchers and University of Wisconsin economist Timothy Smeeding and presented at the 2013 annual meeting of the American Economic Association, found that consumption inequality grew about two-thirds as much as income inequality between 1985 and 2010.

Another study, by researchers from Princeton and the University of Rochester, adjusted the CES data for what they called “systematic measurement error” and concluded that consumption inequality does in fact track income inequality, as high-income households have shifted their spending away from necessities and toward luxuries. (The CES data, they argue, underestimate consumption of certain types of goods and are vulnerable to richer households under-reporting their consumption generally.)

econInequality_wealthA third way to look at economic inequality involves household wealth. People of great accumulated wealth may not receive much in the way of income (trust income and capital gains on stocks and other investments, for example, often are excluded from income analyses), while people who earn a lot but also have high expenses (such as child care or tuition) may not consider themselves especially wealthy.

Wealth inequality tends to be much higher than either income or consumption inequality, but also to be more stable over time. NYU economist Edward Wolff, for instance, has used data from the Survey of Consumer Finances (and similar prior surveys) to track household net worth over time.

Wolff found that in 1962, the top 1% of households held 33.4% of all wealth; in 2010 their share was 35.4%. The biggest increase came in the tiers of wealthy just below the 1% — their wealth share rose from 33.6% in 1962 to 41.3% in 2010. As for the bottom 40%? Their share fluctuated between 1.5% and -1% (i.e., negative net worth) for the entire four-decade period Wolff studied.

Topics: Income Inequality, Wealth

  1. Photo of Drew DeSilver

    is a Senior Writer at the Pew Research Center.

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13 Comments

  1. tope5 months ago

    pls can i get some one to talk to on how i can measure household inequality for each household within a population. thanks

    Reply
  2. Fred Schnaubelt7 months ago

    Ronald Reagan once remarked that liberals see a fat man beside a thin man and conclude the fat man has been taking food out of the mouth of the thin man. Before the income inequality gap rose noticeably Doctors used to marry unemployed housewives. Then they started marrying other doctors, attorneys, or professionals with high incomes.

    To narrow the income gap doctors should be prohibited from marrying other doctors, and smart or hard working people should be forced to marry dumb lazy people. Of the ways to measure inequality on the Pew Research list I don’t see a gap for caloric intake list. For instance does Bill Gates (Microsoft) with his $60 billion eat 60 billion more meals a day than a poor person? Does he drive 60 million more cars a year, does he live in 6 million more homes? Or does he invest 99% of his money in technology, equipment and tools which enable lower income people to be more productive for each hour they work and increase their income and standard of living?

    Reply
  3. c. duane baker7 months ago

    Complicated. how do you decide who is in what quintile? And just sticking to income; are we alloting “income” to each quintile on the basis of gross income as defined by IRS less taxes fed, state and local, plus all soc sec pmnts less taxes, plus welfare pmnts, food stamps, unemploymewnt insurance and other transfers ? wouldn’t this give you comparative spendale incomes?

    Reply
  4. Packard Day7 months ago

    It would seem that the past five years have been very (very) good for those with significant investment portfolios. Whoo hoo! Let the good times roll.

    So tell me truthfully now. How is all of that “hope & change” working out for the bottom 90% these days? A lot of folks wish to know if it is still Bush’s fault or is global warming now the new culprit of the hour that is responsible for President Obama’s political discomfort?

    El hambre es la mejor salsa…get used to it.

    Reply
  5. Christine8 months ago

    slk, you make it sound so simple. Believe me, even if you do strive to make yourself better, it doesn’t always work out in your favor. Making yourself better and working hard doesn’t always lead to riches. That’s just what certain members of society want you to believe in order to make themselves feel better.

    Reply
    1. slk8 months ago

      then give up??? i’m an immigrant, and my father continually worked hard, as i do, to make a better life!!! i will “never” expect to be given, what was taken from someone else!!! when you “expect”, you’ll always “expect” more!!!

      Reply
      1. john6 months ago

        It’s a matter of using the law of numbers to your advantage…and using ones brain instead of their back.

        Reply
  6. gehm8 months ago

    One for all. All for one!

    Reply
  7. slk8 months ago

    strive to make yourself better, is a good place to start!!! most people who are “rich”, didn’t get there, by waiting for assistance!!!

    Reply
  8. Martin Screeton8 months ago

    I thought I was barely perceptible, Now you’ve confirmed it! :) ha ha … Funny that I was for a few years actually in the 1%, then again, that was the late 90′s! Everybody got rich that decade.

    Reply
  9. Gus Rader8 months ago

    Any way you slice it, the rich have gotten richer off the backs of the shrinking middle class. The income inequality that exists today harkens back to a dark period in US history. Capitalism is now eating it’s own.

    Reply
    1. slk8 months ago

      how dare the “rich”, force all those people to foolishly spend, what they don’t have!!! eventually, you run out of other peoples money!!! margaret thatcher…very smart woman!!!

      Reply