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Inequality: What's In A Name?

A factsheet recently published by the Pew Research Center describes "The Many Ways to Measure Economic Inequality."  There are multiple ways to define and measure economic inequality; as a consequence, economists disagree on how much inequality there is.

The US Census Bureau, for instance, uses income and publishes two measures of income inequality each year.

  • The first shows the share of total annual income by income bracket groups.  According to this measure, "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.)."  
  • 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 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."  The US Gini is among the highest in the developed world.



But income is seen by some as a flawed measure of economic inequality because it doesn't take into account transfer payments (such as Social Security, food stamps and unemployment benefits) that effectively reduce inequality.  Nor does it include all the economic resources available to households (such as accumulated family wealth).  Another way to look at inequality then, is to measure household consumption.  "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."


Yet a third way of measuring economic inequality focuses on household wealth.  This measure captures those people who are wealthy but receive little income.  "Wealth inequality tends to be much higher than either income or consumption inequality, but also to be more stable over time ... [I]n 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."


Read more:
http://www.pewresearch.org/fact-tank/2013/12/18/the-many-ways-to-measure-economic-inequality/
http://www.pewresearch.org/

TeachingWithData.org resources:
Income Inequality in the US (http://www.teachingwithdata.org/resource/3182)
An Analysis of Earnings (http://www.teachingwithdata.org/resource/3159)
NYT Interactive: What Percent Are You? (http://www.teachingwithdata.org/resource/3913)
Recession Trends (http://www.teachingwithdata.org/resource/3067)
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