Like most people, whether you’re in the bottom “99%” or the top “1%” of income earners, you’ve heard much lately about the issue of income disparity. I was curious if all this acrimony is based on something real or imagined. Is there an actual structural demarcation in income levels that has suddenly manifested itself here? There’s a lot of economic misinformation out there masquerading as absolute truth from various partisan think tanks and the daily talking heads on TV. I was really looking for a way of elucidating the nature of this disparity and possibly quantifying it in order to more fully understand the extent to which it may segregate our society. As a retired scientist I don’t believe that I have any unique insights into this issue, but I still have good research and number crunching skills and a heightened desire to separate fact from fiction regarding this contentious issue. I also have a somewhat selfish motivation for pursuing this issue. Now that my wife and I are retired and living on more of a ‘fixed’ income, developing a greater understanding of this issue may also help us to better plan our own financial future.
“This income disparity is not a new or even recent event. In fact, it’s not an event at all, but a process that has been steadily ongoing, virtually unchecked, for the last forty years and more.”
My first stop, and pretty much my last stop as it turns out, was the U.S. Census Bureau. What a treasure trove of data, and more importantly, data that is unbiased and unattached to any partisan organization. Demographers, economists and others may quibble with how the Census Bureau gathers its data, but as far as I know no one has ever made an adequate case that the data is politically biased. So, the information I present here is gathered entirely from the U.S. Census Bureau and can be accessed on-line through their website. My contribution was to gather and array the data in a form that is more illustrative than the hundreds of rows and columns of tabular data in the Census Bureau’s database. Also, where ranges of data are provided, these ranges represent the total range of data available through the Census Bureau, with no truncating on my part. I presented what I found.
My intent here is not to make a political statement, although I acknowledge that the subject itself is politically charged given today’s climate. As a social issue I believe that this subject touches millions of lives in one way or another. This is not an in-depth economic analysis, but merely an attempt to understand and quantify basic income-related trends. I also wanted to use fairly basic, easily accessible and unbiased data to hopefully bring clarity to a complex and often misrepresented subject. Anyone can access this data, and hopefully my cursory analysis here may stimulate others to dig even deeper into this often polarizing issue.
Historical View of Income Disparity
First let’s provide some quantification to the income disparity question itself. Figure 1 shows the Gini Index of Income Dispersion data from 1947 through 2010. Yes, an actual quantitative measure of income disparity (or dispersion) actually exists, and has for quite some time. This index was first developed in 1912 by the Italian statistician Corrado Gini and has been used by economists, scientists (including ecologists) and others to measure disparities across various groups and populations. Ecologists use similar computational indices to measure diversity within an ecosystem, that is, how evenly the individuals in an ecosystem are distributed among the species present. In the case of income disparity (or dispersion) the Gini Index measures how evenly the wealth of a nation is distributed amongst its people. The index has a theoretical range from 0 to 1, where a value of 1 would mean that one person has all the accumulated wealth, and a value of zero means that the wealth is distributed evenly among its population.
The Gini Index graph (see Figure 1) shows that at least through the mid to late 60s the index fluctuated somewhat but remained more or less flat or in a slight decline until the late 60s. Beginning in about 1968 the index increased steadily from year to year, indicating that the income distribution in America has become increasingly more concentrated among a smaller and smaller minority of the country’s wealthiest people. This trend, according to the Gini Index, has been occurring steadily over the last 40+ years. The amazing thing to me is that, given how accessible this information is through the Census Bureau, we haven’t heard much about it before now.
If you’re interested in how the US compares with other countries, you can check the Wikipedia discussion of the Gini Index (I’m sure there are many other sources as well). Historically, developed European nations and Canada tend to have Gini indices between 0.24 and 0.36, while the United States’ and Mexico’s Gini indices are both above 0.43, indicating that the United States and Mexico have greater income inequality than that of either Europe or Canada. One interesting trend shown in the Wikipedia graph of the Gini Index of other countries is now that China has moved into a more capitalistic economic model, their Gini Index has now risen to the level of the US, after decades of much lower GI values. Be careful what you wish for.
I believe that the main value of the Gini Index in this discussion is in observing the long-term trend in the US, which has been increasing steadily over the last 40 years. The Gini Index data for the US most definitely shows that there is a long-term trend of increasing income disparity in this country, where a greater share of the aggregate wealth is accumulating within the top income ranks. Now let’s take a look at other ways of identifying just where this disparity is occurring within our society.
Figure 2 shows the long-term median income trend across income brackets in the US, using data from 1967 through 2010, and adjusted for 2010 dollars (which basically takes into account inflation, and is a better indicator of purchasing power over the decades observed). The adjustment for inflation was done by the Census Bureau. This graph is most telling in terms of showing where this income disparity is occurring. You can see that the incomes of the lower four quintiles (the lower 0-20%, 20-40%, 40-60% and 60-80%) of households has remained fairly flat over the last 43 years, while the incomes of the upper 20% of all households have risen considerably, especially the top 5% who have seen their incomes rise significantly during this period. This figure also shows that over the last decade, even the upper 20% and 5% income brackets seemed to level off a bit. In any event it looks like “Trickle-Down Economics” doesn’t really trickle down very far, certainly not below the upper 20% household income level.
Figure 3 shows the relative increase of each of the 20% (quintile) segments of household earnings between 1967 and 2010. The lowest quintile of wage earners increased their purchasing power by almost 21% over this 43 year period, and the second quintile only increased by about 13.2%. The third quintile (the 40-60% range of household incomes) increased by about 22.1% over the same period. The wage earners in the 60-80% quintile fared somewhat better with an increase of almost 40%. The top 20% of wage earners had a nearly 67% increase in their real purchasing power over this 43 year period. The top 5% of wage earners weighed in with a 79.3% increase over the same time period. Unfortunately the Census Bureau does not give data for the top 1% (or at least I didn’t come across such data in their database).
So it’s quite clear from the data so far that the wealth of this country is being more concentrated over time into fewer and fewer people at the top. In addition, those upper end (top 20% and the top 5%) wage earners are not only earning more, their wealth is expanding at a faster rate than those in lower-income brackets.
Winners and Losers
Now let’s take a look at another aspect of income disparity, namely an individual’s share of the wealth and how this has changed over time. Figure 4 shows the share of aggregate income by each fifth (quintile) income bracket of the population and the top 5% income bracket. What this figure shows is that unless you’re in the top 20% (and especially the top 5%) income bracket, you’ve seen your share of the pie actually decrease
steadily over the last four decades. Figure 5 shows the percent change in share of aggregate income between 1967 and 2010 for each of those 20% segments of household incomes. The lowest, second lowest and third lowest 20% income brackets have seen their share decrease by 22.2%, 27.3% and 18.5% respectively between 1967 and 2010. Conversely, the top 20% have seen their share increase by 13.2% and the top 5% gained by 19.2% over the same time period. Essentially the old adage seems to hold true that “…the rich get richer, and the poor get poorer.” And now we know by how much.
The preceding data makes it pretty clear that there is a quantifiable income disparity in this country and it can be characterized by the following trends:
The wealth of this country is being more concentrated over time into fewer and fewer people at the top.
Upper end (top 20% and the top 5%) wage earners are not only earning more, their wealth is expanding at a faster rate than those in lower-income brackets.
The bottom 80% of wage earners have seen their share of aggregate wealth steadily decline over the past forty years, while the upper 20% has steadily increased their share of this country’s aggregate wealth.
This income disparity is not a new or even recent event. In fact, it’s not an event at all, but a process that has been steadily ongoing, virtually unchecked, for the last forty years and more.
I’m not in a position to look at causative factors here, as this is well beyond my expertise and beyond the limits of what these data can provide. But I am intrigued by the fact that, for the long-term income data shown here, the trends observed in these graphs are fairly steady and uniform over time, especially in the lowest four income brackets. With the exception of the first twenty or so years of the Gini Index the trend line trajectories of each indicator, whether rising or falling, are fairly linear with no major peaks and valleys. One might expect to be able to look at such long-term income data and be able to observe the effects of changes in political party control or major shifts in economic policy. This doesn’t seem to be the case here when looking at these data, at least not to me.
Such a relatively unwavering trajectory as seen in these graphs would seem to suggest that the ability to significantly alter the vector of these trends is beyond the power of either the White House or Congress for that matter. With all the tinkering and political dynamics occurring over the last forty years, one would think that some evidence of the effect of all this tinkering would have somehow manifested itself in these income trends. Perhaps intrinsic market forces overwhelm any attempts to control the direction of these trends by purely political means. This is well beyond my pay grade to figure out. Along these lines, however, it might be worth studying history to see what if anything may have happened in or around 1968 which is when the Gini Index seemed to take off and continue its steady increase for the next 40+ years.
I am not an economist, but when I look at the long-term trends shown in median income (Figure 2) and aggregate share of income (Figure 4), I would suggest that there are two distinct functions or causative agents at work here; one controlling the upper 20% (and 5%) and another distinctly different function controlling the lower 80%. Perhaps the upper 20%, whose wealth has been expanding continually is driven more by market forces, and the lower 80% is controlled more by labor related economic policies. Obviously this is a simplistic view of a very complex set of issues, but one can’t help but try to make some sense of what’s actually happening here.
With all the rhetoric today concerning the 1% vs. the 99%, perhaps it may be more appropriate to take a broader look at the upper 20% vs. the lower 80%, because that’s where the real point of economic demarcation seems to lie. Perhaps we have reached some sort of tipping point of income disparity, which has prompted such movements as “Occupy Wall Street”. It also seems quite clear that an increasingly robust wealthy class appears to do little or nothing to either enhance the economic condition of the lower wage earners, or to shelter them from national economic downturns. I think this data clearly shows the limits of the “Trickle Down” theory. What we need to be asking ourselves is not why this disparity seems so insidious now, but how and why has it been growing unchallenged for the last 40 years or more, and is there a way to bring this disparity back into some kind of balance.
© Phil Wendt 2011
Further Reading: If you found this essay intriguing, then you may wish to read my follow-up essays entitled; “Income Disparity by the Numbers: Volume II – The One Percent.” , ”Income Disparity by the Numbers: Volume III - How We Got Here.” and “Income Disparity by the Numbers: Volume IV – The 2012 Election: Wealth vs. Jobs“.