FRBSF Economic Letter
97-03; January 31, 1997
Inequality in the United States
In recent months, there has been much public discussion of the continuing
increase in income inequality in the U.S. (Weinberg 1996). Some commentators
suggest that the rich are getting richer, the poor are getting poorer,
and those in the middle are getting nowhere. Others argue that data on
household incomes in a single year are a misleading indicator of inequality
and that there has been no worsening of long-run opportunities (Cox and
Alm 1995). This Economic Letter tries to sort out some of these
conflicting claims.
Recent changes in inequality
The data underlying the statistics of the distribution of income come
from an annual survey of households conducted by the Census Bureau. The
degree of income inequality often is measured by the Gini index. This
index summarizes the extent to which the income distribution departs from
perfect equality. It is constructed by looking at the proportions of the
population that receive various proportions of total income. If all families
were to receive equal incomes -- so that, for example, 20 percent of the
population receives 20 percent of the income -- the value of the Gini
index would be 0. Conversely, if one family were to receive all the income
-- complete inequality -- the Gini index would be 1. Because it is a summary
statistic, the Gini index cannot capture all aspects of the income distribution
that might be of interest. For example, a disparity between poor and middle-income
families might yield the same Gini index as one between middle-income
and rich families, but might raise different concerns.
In terms of the Gini index, the distribution of income among American
families tended to become more equal in the two decades after World War
II. Between 1947 and 1968, the Gini index declined about 7 percent. However,
inequality has been rising since 1968, and the Gini index surpassed its
1947 level in the early 1980s (see Figure 1). Since the 1960s, a decreasing
proportion of persons has lived in "families" (two or more persons
living together and related by blood or marriage), so the focus has shifted
to "households" (one or more persons sharing a housing unit).
From 1968 to 1989, the Gini index for households increased 11 percent
with most of this rise occurring in the 1980s. Inequality has continued
to increase in the current decade, but it does not appear to have accelerated.
Two features of these data might cause the numbers to give an incomplete
impression of the income distribution and of how it has changed over time.
First, the numbers refer only to money income and exclude noncash benefits
provided by employers or governments. Second, the data provide a series
of snapshots of the income distribution rather than following the fortunes
of the same group of households over time.
In recent decades; a rising proportion of employee compensation has
come in the form of benefits, such as health insurance and retirement
contributions, rather than cash. Between 1968 and 1995, this proportion
rose from about 5 percent to almost 12 percent. Many low-income households
do not receive these benefits, either because they are not employed or
because their employers do not provide them. Hence, the upward trend in
these benefits probably has raised the compensation of non-poor households
more than that of poor households.
There are no comprehensive data showing the distribution of employer-provided
benefits among households. The data that are available suggest that the
effect of benefits on the distribution of income goes roughly in the direction
suggested above, but has been relatively small. The Census Bureau (Census,
April 1996, Table 1) tabulates the distribution of income and calculates
the Gini index both including and excluding health insurance supplements
to wages and salaries, which represent about two-thirds of employer-provided
benefits. Including these benefits increases the share of total income
received by middle-income households, has almost no effect on the share
of low-income households, and reduces that of upper-income households.
Thus, it slightly widens the disparity between middle- and low-income
households and narrows that between the middle and the rich. Its net effect
on overall inequality measured by the Gini index is very small. There
are no data on the distribution of other employee benefits, but it seems
likely that these income supplements also disproportionately benefit middle-income
households.
The income-distribution data include cash benefits received by households
from governments and these transfers reduce overall inequality significantly,
since many go to lower income households. In 1994, these benefits reduced
the Gini measure of inequality by about 18 percent and increased the share
of total income going to the bottom quintile of households by 3.8 percentage
points. However, judging by their impact on Gini ratios, changes in these
programs appear not to have had much effect on the trend of inequality
in the last fifteen years (Census, April 1996, Table 1). As with employer-provided
benefits, the inclusion of noncash government benefits -- such as Medicare
and food stamps -- has only a small effect on overall inequality. These
benefits-in-kind primarily benefit the poor, but increase the income-share
of the bottom quintile of households by less than 1 percentage point.
Commentators who argue that income inequality is not as serious a problem
in the U.S. as the Gini measures might suggest often stress that the distribution
of income in a single year will be less important if households have opportunities
to move up or down the income distribution. If today's poor have a good
chance of being tomorrow's rich (and conversely), today's inequality may
be less cause for concern.
Cox and Alm, for example, argued recently (1995) that the degree of
household mobility is so great that the data for a single year "tell
us virtually nothing -- particularly about opportunity." Critics
of this optimistic assessment argue either that the degree of movement
up and down the income ladder is actually quite modest (so that many households
are "stuck" in their current situation) or that the amount of
movement up and down the income scale has not changed much, so that changes
in the degree of inequality do provide useful information.
Because households do move up and down the income scale, the income
distribution in a single year is likely to be a biased indicator of inequality
over a longer period. At any time, it is likely that, among low-income
households, more are having an unusually bad year than an unusually good
one, so their current income under-estimates their longer-run situation.
Conversely, current income tends to overstate the longer-run average among
high-income households. Thus, focussing on a single year exaggerates the
degree of true inequality. It is important to recognize, however, that
this factor would mitigate the upward trend in inequality only
if this source of bias has been increasing. It seems unlikely that this
has occurred because fluctuations in the economy do not appear to have
worsened since the 1960s.
The overall distribution of income is affected by demographic changes
that cause some classes of households to become a larger share of the
population and other classes to decline. Two examples of such demographic
changes that may have increased inequality in recent years are the greater
number of two-career households, which has increased the number of high-income
households, and of single-person households, which has added to the proportion
of low-income households. These changes have widened income disparities,
but both may be viewed as reflecting rising living standards and the greater
opportunities available to many individuals. For example, one interpretation
of the increased number of two-income households is that it reflects the
improved opportunities available to married women, rather than being forced
on couples by worsening opportunities for married men. Similarly, the
rising proportion of one-person households may be a symptom of rising
incomes that have made living alone -- especially for older persons --
more feasible. As a final example of a demographic change that may have
added to inequality, the increase in immigration in the last two decades
probably has tended to widen the gap between rich and poor, because new
immigrants generally have lower incomes than native-born Americans and
often rise more slowly up the income scale (Samuelson 1996).
In an attempt to get at the degree of income mobility in the U.S., various
studies have attempted to track the incomes of a sample of households
over a series of years. Cox and Alm cite a study of 14,000 tax returns
from 1979 to 1988. Among this sample of taxpayers, 86 percent of those
who were in the lowest quintile in 1979 had moved up one or more quintiles
nine years later and 15 percent had risen to a real income that would
have put them in the top quintile in 1979. Conversely, 35 percent of those
who began the period in the top quintile had moved down by one or more
quintiles by 1988. Cox and Alm argue that these data imply that only a
minority of households remain stuck in one part of the income distribution
for long periods.
However, these numbers may exaggerate the degree of true mobility since
many of the income changes reflect the normal effects of aging: young
persons experience rising incomes as they advance into their prime earning
years, while older households move into retirement and lower incomes.
And as the whole economy grows, most households move up in absolute (even
if not in relative) terms, so it is not surprising that Cox and Alm find
that most Americans enjoy rising real incomes as time passes.
In a critique of Cox and Alm, Gottschalk (1996) finds (using a different
data set) that of those individuals who were in the lowest quintile of
incomes in 1974, more than two-fifths remained in this same relative position
in 1991. Similarly, more than half of those who were in the top quintile
in 1974 were still there in 1991. These results imply less relative income
mobility than Cox and Alm claim and thus more reason to be concerned about
rising inequality.
Gottschalk also argues that there is no convincing evidence that mobility
has improved over time, so that although many persons at the bottom will
move upward over time, their chances of doing so have not improved as
their relative position has worsened. While it may be the case that many
of those who are now at the bottom of the income distribution will not
be there in later years, it remains true that these households are relatively
worse off than their predecessors were in the past and there is little
evidence that their chances of moving up have improved.
Nonetheless, it is well to remember that significant numbers of persons
do improve their relative position as time passes and even more
improve their absolute position. Gottschalk's data show that of those
who were in the lowest quintile in 1974, only 30 percent had not moved
to higher income levels by 1991.
The gap between the incomes of the rich and the poor has been widening
for three decades, though this trend has not accelerated in the 1990s.
Income inequality clearly is mitigated by the fact that many persons move
up (and down) the income scale over their lifetimes, but there is no clear
evidence that mobility has improved as inequality has increased. Nonetheless,
many persons do improve their relative position as time passes and a substantial
majority experience rising absolute incomes as the economy grows. Measured
inequality also may have been increased by social and demographic changes,
some of which may be due to these rising absolute living standards.
Brian Motley
Research Officer
Cox, W. Michael, and Richard Alm. 1995. Annual Report. Federal
Reserve Bank of Dallas.
Gottschalk, Peter. 1996. "Notes on 'By Our Own Bootstraps: Economic
Opportunity and the Dynamics of Income Distribution'." Boston College.
Mimeo.
Samuelson, Robert J. 1996. "Immigration and Poverty." Newsweek
(July 13).
U.S. Bureau of the Census. 1996. "Income, Poverty and Valuation
of Noncash Benefits: 1994." Current Population Reports,
P60-189 (April).
Weinberg, Daniel H. 1996. "A Brief Look at Postwar U.S. Income
Inequality." Current Population Reports, P60-191 (June).
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco,
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
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Research Department
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