September 22, 2015

The many ways to measure economic inequality

Issues of economic inequality have pushed their way back into the national and global conversation – from Pope Francis and Sen. Bernie Sanders to Thomas Piketty and ongoing debates about raising the minimum wage. Surveys, though, show a wide partisan gap in views of whether inequality is a problem that should be addressed. For instance, an NBC News/Wall Street Journal poll in January found that, while 67% of Democrats identified reducing income inequality as an “absolute priority,” just 19% of Republicans did.

The View From the TopAnd economists are also divided on just how to define and measure inequality. As Federal Reserve economist Arthur Kennickell wrote in a 2009 paper, “‘Inequality’ 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 more unevenly distributed than income, while consumption is less concentrated at the upper end than either wealth or income.

The most-cited measures of inequality involve income. In a recent report, for instance, the Organization for Economic Cooperation and Development noted that “in OECD countries, the richest 10% of the population earn 9.6 times the income of the poorest 10%.”

The U.S. Census Bureau publishes two measures of income inequality each year. According to the most recent report, the top 5% of households received 21.8% of “equivalence-adjusted” aggregate income in 2014, while the bottom 60% received just 27.1%. (Equivalence-adjusted estimates factor in different household sizes and compositions.)

Share of Total Annual Income by Income Bracket Groups

The 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 one (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 0.464 last year. (Other researchers, such as University of California, Berkeley’s Emmanuel Saez, have tracked income inequality over long periods using somewhat different measures and reached similar conclusions.)

But some economists say income data have too many flaws to be the primary measure of inequality. For one thing, many income-inequality measures use income before accounting for the impact of taxes and transfer payments (such as Social Security, food stamps and unemployment benefits), which act to reduce inequality. According to the OECD, taxes and transfers cut the United States’ 2013 income Gini from 0.509 to 0.401 (although that latter figure still is among the highest in the OECD and has risen over time – it was 0.307 in 1980).

In addition, critics of the income-based approach note that an individual’s (or household’s) income can vary considerably over time, and may not reflect all available economic resources – 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 (CES), 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.


But other economists have looked at consumption data and reached different conclusions. One recent study, prepared by two Census Bureau 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.

A 2012 study by researchers from University College London, the University of Chicago and Stanford adjusted CES data to try to overcome “measurement error problems” and concluded that between 1986 and 2010 “consumption inequality [had] increased by only slightly less than the increase in income inequality.” That study also found that consumption inequality increased within all skill groups (as measured by educational attainment). Yet another study, by researchers from Princeton and the University of Rochester, reached similar conclusions. (Those researchers argued that the CES systematically underestimates consumption of certain types of goods and is vulnerable to richer households underreporting their consumption generally.)

Distribution of U.S. Wealth, 2013A third way to look at economic inequality involves household wealth. People with 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 it also tends to not vary as much over time. New York University 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 2013 their share was 36.7%. The biggest increase came in the next-wealthiest tier, representing 4% of households: Their share of wealth rose from 21.2% in 1962 to 28.2% in 2013. As for the bottom 40%? Their share fluctuated between 1.5% and -0.9% (i.e., negative net worth) for the entire five-decade period Wolff studied.

A Pew Research Center analysis last year found that the wealth gap between upper-income people and the rest of America was the widest on record: In 2013, the median net worth of the nation’s upper-income families was 6.6 times that of middle-income families, and nearly 70 times that of lower-income families. The analysis also found that since 1983, virtually all of the wealth gains made by U.S. families have gone to the upper-income group.

Note: This post has been updated since its original publication on Dec. 18, 2013.

Topics: Economics and Personal Finances, Income, Income Inequality, Research Methods, Socioeconomic Class, Wealth

  1. Photo of Drew DeSilver

    is a senior writer at Pew Research Center.

17 responses to “The many ways to measure economic inequality”

  1. Gus Rader says:

    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.

    • slk says:

      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!!!

  2. 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.

  3. slk says:

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

  4. gehm says:

    One for all. All for one!

  5. Christine says:

    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.

    • slk says:

      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!!!

  6. Packard Day says:

    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.

  7. c. duane baker says:

    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?

  8. Fred Schnaubelt says:

    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?

  9. tope says:

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

  10. Nalliah Thayabharan says:

    The rich have assets while the poor holds debt. Political shocks, institutional changes, and economic development play a major role in wealth inequality. I do not view return on capital -“r” > the growth rate of the economy -“g” as the only or even the primary tool for considering changes in income and wealth in the 20th century or for forecasting the path of inequality in the 21st century. Piketty’s r > g doesn’t adequately differentiate among different kinds of capital with different social utility. Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.

  11. Hans Goerl says:

    A pretty simple explanation here: In 1962 the marginal income tax rate on the top 1% was 87%. This was at the end of the highest economic growth rate in US history. Ever since then, no matter who was in power, that top marginal rate has crumbled to around 28%. But our economic growth rate has not approached that of the 1950’s. Any bets on which of the current candidates wants to “make America great again” by jacking the top income tax rate back up to, say, a mere 50%?

  12. Paula T says:

    Right before 9/11 – at the beginning of the new Millennium, I was right where the Middle-Income earnings were… By 2013, I was right where the current Middle-Income earnings are – a difference of almost $40K, which would’ve paid my income taxes, and netted me the $96K after taxes. Yet, taxes have gone up, rent/food/cost of living has “tripled” in the last 14 years.
    Every January food prices go up as if the New Year ordains a “Raise” and again before the Summer (I guess for seasonal shopping) and again in September, right when kids are supposed to start school, but incomes have flatlined.
    Ever since Reagan said two can live as cheaply as one, it’s become our reality, assuming we can do “more” with “less”
    According to my income, I’m told I can “afford” to pay $2,100/month for rent which is 45% of my net (after-tax) income, with No Hope of ever affording/saving for a Home!

  13. Charron Daughtry says:

    No equally allows an uneven path. All race groups should be allowed to have a business. They would also hire employees creating mire equal balance for diversity.

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