Sunday, October 28, 2007

Why Income Inequality Has Increased and Why It Really Doesn't Matter

From "Making Sense of Income Inequality" by Diana Furchtgott-Roth:

1. Percent of bottom quintile households who own their homes free of debt: 30%

2. Percent of top quintile households who own their homes free of debt: 17%

3. Percent of top quintile households who have two or more earners: 75%

4. Percent of bottom quintile households who have multiple earners: 2.6%

5. Average age of those in the lowest income quintile: 54 years

Conclusion #1: One reason that the top quintile of households collects more income is that these households tend to have more full-time earners. Census data show that the top quintile has two income earners per household, whereas the bottom quintile has about one earner for every two households. This means there are more than four times as many full-time workers in the top fifth of the income distribution as there are in the bottom fifth.

Women now earn well over half of all B.A. and M.A. degrees, plus half of all medical and law degrees. With higher numbers of well-educated women in the workforce, marriage often combines two medium-earning single-person households into one high-earning two-person household. Such demographic changes have increased both the number and relative wealth of two-earner couples.

Conclusion #2: The average age of the bottom 20% by income (54 years) suggests that the bottom quintile is actually a mix of: a) very young low-income earners and b) many older retirees who are probably in one the top quintiles by wealth (they own their homes free of debt at almost twice the rate as the top 20% by income) even though they might be quite wealthy and living off accumulated savings and investments.

Conclusion #3: In a dynamic economy like the U.S., people typically move among income groups as they grow older and advance in their careers, so a snapshot view of income statistics does not reflect Americans’ true well-being. Given the reality of income mobility, some low-income households arguably are not poor. They may be students who have yet to enter the workforce and whose earnings will rise, or wealth retirees.

Most people, even Bill Gates, Tiger Woods, Oprah and Howard Stern, start in the lowest income quintile early in their lives and careers, advance into one of the higher qunitiles as they become successful, and drop back to one of the lower quintiles by income later in life, even though they might be in one of the top quintiles by wealth.


At 10/29/2007 8:47 AM, Anonymous Anonymous said...

"Most" people end up in the higher quintiles at some point in their lives? Most people *you* know, which I am sure is a representative sample -- of what, people too smart to work with their hands but too poor to be born into the "ownership society?"

At 10/29/2007 8:55 AM, Blogger Thomas Blair said...


Here is one of many article on income mobility. Among the cited statistics: A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile.

As people age and obtain work experience, they increase their earnings. Also, remember that quitiles are a snapshot, and are not indicative of long-term patterns.

At 10/29/2007 8:58 AM, Blogger Thomas Blair said...

I forgot the link. :)

At 10/29/2007 9:01 AM, Anonymous Anonymous said...

Blair -

Thanks for the reply. But note you refer to moves to "a" higher quintile (e.g., move from bottom to 21th percentile would count). Perry said "the" higher quintiles (as in, above median income). Big difference.

BTW, 1988 was 19 years ago... Would love to see more recent data.

At 10/29/2007 11:11 AM, Blogger Mark J. Perry said...

To be in the top 50% by income requires household income above $29,000 and in the top 25% income above $56,000 (2005 IRS stats).

I would estimate that the top 40% (top 2 quintiles) would be household income above about $40,000. I am confident that most households fall into that category at some point in their lives.

At 10/29/2007 1:36 PM, Anonymous Anonymous said...

Right... and at that point in their life-cycle, most are probably in 2 wage-earner households (with 1.5 kids). $40,000 smackers! Woo hoo! That's some serious mobility there.

At 10/30/2007 11:36 AM, Anonymous Anonymous said...

Mark J. Perry said...

To be in the top 50% by income requires household income above $29,000 and in the top 25% income above $56,000 (2005 IRS stats).

In California, in the small town where I live, a lead tree trimmer can expect to receive nearly $100,000 in compensation annually.

To qualify for low income housing in some parts of the San Francisco Bay area a household must earn less than $128,000 per year.

Everything is relative and there are NO generalized national statistics that shed any accurate or useful light on income inequality in this country.


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