Income inequality in the United States

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This graph shows the household income of the given percentiles from 1967 to 2003, in 2003 dollars. The light blue line represents the median household income.^[1]

Income inequality in the United States refers to the extent to which income, most commonly measured by household or individual, is distributed in an uneven manner. While there seems to be consensus among social scientists that some degree of income inequality is needed, the extent of income inequality and its implications on society continue to be a subject of great debate, as they have been for over a century.^[2] The majority of social scientists believe that income inequality currently poses a problem for American society with Alan Greenspan stating it to be a "very disturbing trend."^[3][4] Meanwhile, other, mostly conservative social scientists argue that income inequality with contemporary trends persisting is not a cause for concern and that current measures used to determine income inequality are not precise enough to produce accurate readings.^[5] A 2004 poll of 1,000 economists showed that the majority of economists favor "redistribution."^[6] A study by the Southern Economic Journal found that "71 percent of American economists believe the distribution of income in the US should be more equal, and 81 percent feel that the redistribution of income is a legitimate role for government."^[7] Data from the United States Department of Commerce and Internal Revenue Service indicate that income inequality has been increasing since the 1970s,^{[8][9][10][11][12]} whereas it had been declining during the mid 20^th century.^[13][14] As of 2006, the United States had one of the highest levels of income inequality, as measured through the Gini index, among high income countries, comparable to that of some middle income countries such as Russia or Turkey,^[15] being one of only few developed countries where inequality has increased since 1980.^[16]

In the early half of the 20th century, both the border closure movement and high school movement taking place in the United States shifted out the supply of skilled work. As a result, the country experienced falling inequality due to falling wages of skilled workers relative to unskilled workers. Despite a decrease in inequality during the 1940s, 50s and 60s, inequality has been increasing since.^[13] While income increased among all demographics,^[17] the upper-most earners saw substantially larger increases.^[18] According to economist Janet Yellen "the growth [in real income] was heavily concentrated at the very tip of the top, that is, the top 1 percent."^[19] A 2006 analysis of IRS income data by economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics showed that the share of income held by the top 1% was as large in 2005 as in 1928. The data revealed that reported income increased by 9% in 2005, with the mean for the top 1% increasing by 14% and that for the bottom 90% dropping slightly by 0.6%.^[11] Between 1979 and 2005, the mean after-tax income for the top 1% increased by 176%, compared to an increased of 69% for the top quintile overall, 20% for the fourth quintile, 21% for the middle quintile, 17% for the second quintile and 6% for the bottom quintile.^[20] For the same time span the aggregate share of after-tax income held by the top percentile increased from 7.5% to 14%.^[20] The diminishing political clout of labor unions, resulting from declining union membership rates, and less government redistribution as well as decreased expenditure on social services are commonly cited as the main causes of this trend.^[16] In addition to the top earners receiving a greater share of earnings than the rest of society, the emergence of a two-tier labor market has led to larger income differences along the lines of educational attainment.^[21] While expertise, productiveness and work experience, inheritance, gender, and race had a strong influence on personal income^[22][23], household income was largely affected by the number of income earners, contributing to inequality between households based on the number of earners in them.^[13] Yet, other causes for income inequality, especially some of those behind its recent rise, remain unknown.^[19]

[edit] Household income

Share of pre-tax household income received by the top 1%, top 0.1% and top 0.01%, between 1917 and 2005.^[24][25]

Household income levels and gains for different percentiles in 2003 dollars.^[26]

Main article: Household income in the United States

Inflation adjusted income data from the Census Bureau shows that household income has increased substantially for all demographics, with larger gains experienced by those with higher incomes. The emergence of dual-earner households has had a substantial impact on increasing household income, especially among households in the upper 20%. Along with the entrance of women into the labor force, the discrepancy between those households with one and those with multiple earners was amplified significantly.^[13] As of 2005, 42% of all U.S. households and 76% of those in the top quintile had two or more income earners.^[27] Income rose considerably faster in the higher regions of the household income strata. Between 1967 income increase experienced for the 95^th percentile, the lower threshold for the upper 5%, was 555.73% as large as the increase in median income, which in turn was 150.63% as large as the increase in income for the 20^th percentile. While the percentage of household with two or more income earners varied greatly across these three demographics, it is nearly identical for the 80^th and 95^th percentile. In 2003 a household in the 95^th percentile earned 77.2% more than a household in the 80^th percentile, compared to 60.5% in 1967, a 27.6% increase in the earnings increase discrepancy between the two groups. Overall the income of the 95^th percentile grew 15.2% faster than that of the 80^th, 146.8% faster than that of the median and 159.9% faster than that of the 20^th percentile.^[26]

Inflation adjusted percentage increase in after-tax household income for the top 1% and the four quintiles, between 1979 and 2005 (gains by top 1% are reflected by bottom bar; bottom quintile by top bar).^[20]

Gross annual household income does not, however, always accurately reflect standard of living or socio-economic status, as it does not consider household size.^[28] Therefore, a large household in the upper quintile may have a lower standard of living than a small household in the fourth quintile. Similarly an upper middle class household with one income earners may have a lower gross annual household income than a lower middle class household with two income earners.^[13] As households in the upper quintile tend to be larger than households in lower quintiles, differences in household income may be larger than differences in standard of living. A recent analysis of income quintile data revealed that the aggregate share of income held by the upper quintile decreases by 20.3% when figures are adjusted to reflect household size.^[29] It should thereby be noted that since 1967, the mean household size in the US has decreased 20.8%,^[30] while income disparities have increased. In 2003, the upper 20% household, who were home to roughly 25% of persons, earned 49.7% of all income before and 39.6% of income, after size adjustments.^[29] Conservatives commonly focused on the flaws of household income as a measure for standard of living in order to refute claims that income inequality is growing, becoming excessive or posing a problem for society.^[5] Liberals maintain that all measures have certain flaws but seem to undoubtedly indicate a significant increase in income inequality^[10]

SOURCE: U.S. Census Bureau, 2004^[1] (Page 44/45)

[edit] Personal income

Median personal income for all earners, 1975 - 2005.^[31]

Main article: Personal Income in the United States

Personal income represents the earnings of individuals and, therefore, directly reflects occupational status, achievement and educational attainment. While many, though not the majority, of income earners reside in households with more than one income earner, trends in personal income are more indicative of the job market and the economy than household income. Personal income has risen considerably since 1953, especially for female workers. For male workers, however, income stagnated during the 1970s and 1980s, increasing substantially during the 1990s and then stagnating once more since 2000.^[32] During the early 1980s, median earnings decreased for both sexes, not increasing substantially until the late 1990s. Since 1974 the median income for workers of both sexes increased by 31.7% from $18,474 to $24,325, reaching its high-point in 2000.^[31] Income inequality has increased considerably as well with the top 1% receiving much larger gains than all other demographics. This group has pulled ahead of other income earners including the remainder of the top 10% considerably during the past few years.^[18][11] Since the 1970s, inequality increased during the 1980s, decreased slightly during the late 1990s and has since continued its overall increasing trend.^[19][12] According to Gini index data income inequality among all workers with incomes increased by roughly 20% since 1967. Both increasing median income, largely connected to an increase in educational attainment, and income inequality with the very top earners gaining a larger share has characterized personal income trends during the past thirty or so years.^[11]

[edit] Gini index

Gini index for households, 1967 to 2001.^[8]

Further information: Gini coefficient

To date, one of the most commonly used measure of income inequality is the Gini index. The Gini coefficient measures income inequality on a scale from 0 to 1, based on the Lorenz Curve. On this scale 0 represents perfect equality with everyone having the exact same income and 1 represents perfect inequality with one person having all income (Scores are then commonly multiplied by 100 to make them easier to understand).^[33] According to the United Nations (UN), gini index ratings for countries range from 24.7 in Denmark to 74.3 in Namibia. Most post-industrial nations had a gini coefficient in the high twenties to mid thirties. The UN places the US Gini index rating at 40, comparable to that of Turkey, Tunesia or Russia.^[34] Since the Census Bureau started measuring the Gini coefficient in 1967, it has risen by 20% for full-time workers and 18% for households. Among households, the index has risen from 39.7 to 46.9,^[35] from 31.4 to 42.4 among men and from 29.8 to 35.7 among women. This means that inequality rose 76.8% faster among men than women and 10% faster among individual than households. The Gini index rating for both sexes combined rose by 20.3% from 34.0 in 1967 to 40.9 in 2005.^[36] According to Gini coefficient data, income inequality in the U.S., already among the highest in the post-industrial world,^[15] has risen considerably between 1967 and 2005 among households^[35] and individuals.^[36]

SOURCE: U.S. Census Bureau, 2006

[edit] Causes

Percent of households with 2+ income earners, and full-time workers by income.^[27]

Income inequality has many causes, some of which are relatively clear, other which remain unknown and yet others which remain disputed. All societies feature some income inequality as the positions people hold in these societies vary in responsibility, importance and complexity. In order to provide sufficient incentive for a wide variety of occupations to be filled with motivated incumbents societies need to provide a variety of rewards.^[37] Income is among the perhaps most prominent forms of compensation. As scarcity creates value, the possession of scarce skills considerably increases income.^[22] In the United States the increasing gap between the top and the rest of society is largely attributed to less bargaining power of wage earners, largely caused by the declining power of unions that have suffered from declining membership rates, as well as less government redistribution, namely a reduction in the progressive nature of the tax structure are cited as the main causes.^[16]

Educational attainment, alongside the amount of work done by individuals were among the main determinants of income. The vast majority of Americans derive their income from occupational tasks and the utilization of their expertise. Two notable exceptions are the upper and lower class, where the most common source of income was not occupational status.^[38] The former group derives most of its income from assets, which are commonly inherited. The incomes of the latter group are largely composed of government transfers. Yet, in general individual income is largely determined by occupational achievement, with household income depending considerably on the number of income earners.^[13][38]

As expected, households in the upper quintiles are generally home to more, better educated and harder working income earners, than those in lower quintiles.^[29] Among those in the upper quintile, 62% of householders were college graduates, 80% worked full-time and 76% of households had two or more income earners, compared to the national percentages of 27%, 58% and 42%, respectively.^[27][22][23] The trend does not, however, apply to the top 5%. Census Bureau data show a slight decrease in the percentage of 2+ earner households, those who worked 50+ weeks per year and those who worked full-time between the upper 20% overall and the top 5% in particular.^[27] This trend towards less work and fewer income earners per household among the top 5% may be indicative of those in the upper-most sphere of the economic strata, where income is largely derived from inherited assets.^[14] US Census Bureau data indicated that occupational achievement and the possession of scarce skills does correlate with higher income to a certain point in the higher levels of the economic strata. From that point on, the correlation between productiveness and income weakens.^[27] Unfortunately detailed US Census data is not available for the top 1% which has received the largest share of income gains.^[18] Thus, while education and hard work generally translate into higher incomes, other factors such as inheritance as well as some which remain unknown, shape income inequality.^[14]

[edit] Role of education

Median personal and household income according to different education levels.^[39][40]

Main article: Educational attainment in the United States

As scarcity creates value, the increased acquisition and subsequent possession of expertise and skill certified through an academic degree increases compensation including income. Increased certified expertise translates into increased scarcity of an individual's occupational qualification which in turn leads to greater economic rewards.^[37] As the United States has developed into a post-industrial society over the course of the late 20^th century, educational attainment has gained in importance. More and more employers now require workers to possess greater amounts of expertise than they did a generation ago while the manufacturing sector which employed many of those lacking a post-secondary education is decreasing in size.^[41] As a result the scarce intellectual skills transferred through post-secondary education curricula have become increasingly important. Thus, income differences between the varying levels of educational attainment were increasing. The resulting economic job market may be referred to as constituting a "two-tier" labor market. In this market the income discrepancy between the professional and working class may be growing. Sociologists such as Dennis Gilbert refer to the professional class as a privileged class due its favorable disposition in the two-tier labor market.^[13] Income gains and median levels were higher among those with the higher academic degrees,^[22] that is those who possess scarce amounts of certified expertise. In other words, higher educational attainment translates into higher personal income levels and larger income increases over time.

While the higher education commonly translates into higher income,^[42] and the highly educated tend to reside in upper quintile households, differences in educational attainment fail to explain income discrepancies between the top 1% and the rest of the population. Large percentages of individuals lacking a college degree are present in all income demographics, including 33% of those with heading households with six figure incomes.^[23] In 2005, roughly 55% of income earners with doctorate degrees, the most educated 1.4%, were among the top 15% earners. Among those with Masters degrees, the most educated 10%, roughly half had incomes among the top 20% of earners.^[40] Only among households in the top quintile were householders with college degrees in the majority.^[23] While discrepancies in educational attainment cannot account for all aspects of income inequality, education remains one of the strongest influences on income distribution, thereby affecting income inequality.^[42]

SOURCE: US Census Bureau, 2004/06^[39][40]

While the returns to education increased considerably in the United States since the 1980s, it has not increased as much in many European countries such as Germany, France or the United Kingdom (Freeman, Richard B. and Lawrence F. Katz, editors Differences and Changes in Wage Structures. National Bureau of Economic Research. Comparative Labor Markets Series. The University of Chicago Press, 1995). The reasons for this discrepancy in inequality trends between Europe and the United States is still the subject of much debate but recent work suggests that tight regulations of labor markets in Europe could have prevented the returns to education from rising there as much as in the United States, but at the expense of creating unemployment (Fernández-Kranz, Daniel, “Why has wage inequality increased more in the United States than in Europe: an empirical investigation of the demand and supply of skill,” Applied Economics, Vol. 38, April 2006).

[edit] Race and gender disparities

Median income for male and female workers from 1953 to 2005 in constant dollars.^[32]

Median personal income by gender and race in 2005.

Further information: Male-female income disparity in the United States

Income levels remain considerably lower for females than for men with certain racial demographics having median income levels considerably below the national median.^[43] Despite, considerable progress in pursuing gender and racial equality, some social scientists attribute these discrepancies in income to continued discrimination.^[44] According to this perspective certain ethnic minorities and women receive fewer promotions and opportunities for occupation and economic advancement than others. In the case of women this concept is referred to as the glass ceiling keeping women from climbing the occupational ladder. In terms of race, studies have shown that African Americans are less likely to be hired than European-Americans with the same qualifications.^[45] The continued prevalence of traditional gender roles and ethnic stereotypes may partially account for current levels of discrimination.^[44] In 2005, median income levels were highest among Asian and White males and lowest among females of all races, especially those identifying as African American or Hispanic. Despite closing gender and racial gaps considerably discrepancies remain among racial and gender demographics, even at the same level of educational attainment.^[46]

Since 1953 the income gap between male and female workers has decreased considerably but remains relatively large.^[32] Even though women currently receive the majority of Bachelor's degrees, male workers still hold higher educational attainment, as the success of women in academia is a relatively new phenomenon.^[22] Though it is important to note that income inequality between sexes remained stark at all levels of educational attainment.^[43] Between 1953 and 2005 median earnings as well as educational attainment increased, at a far greater pace for women than for men. Median income for male earners increased by 36.2% versus 157.2% among female earners. This mean that the median income of women rose 334.5% as fast as that of men. The extent by which men out-earned women reduced by 61.2%, indicating increased gender equality. Today male workers earn roughly 68.36% more than their female counterparts compared to 176.25% in 1953. Furthermore income has increased more or less continuously for women, while the median earning for men have shown some fluctuation and stagnation since the early 1970s. The median income of men in 2005 was 2% higher than in 1973 compared to a 74.6% increase for female earners.^[32] Racial differences remained stark as well with the highest earning sex-gender demographic of workers aged 25 or older, Asian males (who were roughly tied with white males, earning more than twice, 109.7%, as much as the lowest earning demographic, Hispanic females.^[47][48] As mentioned above, inequality between races and gender persisted at similar education levels. In 2005, Asian men, age 25+, with a Bachelor's degree or higher earned 203.8% more than Hispanic females (age 25+) with the same educational attainment.^[49][48] Racial differences were overall more pronounced among male than among female income earners.

An April 15, 2005 article titled "Gender Wage Gap Is Feminist Fiction" from the Independent Women's Forum states, the wage disparities between men and women are largely the result of different occupations in which women and men find themselves. Men tend to work in higher earning occupations and women in lower earning occupations. Thus, if employed in the same job, with same education and same experience women earn 98 cents for evey dollar a man earns.^[50]

SOURCE: US Census Bureau, 2006

[edit] Income at a glance

[edit] See also

• Economy of the United States
• Income in the United States
• Economic inequality
• Income inequality
• Social class in the United States
• Social justice
• Wealth inequality in the United States
• Economic mobility

[edit] References

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