Lecture - Income Inequality Measures 2023

Introduction to Income Inequality

• Economic inequality encompasses differences in income, wealth, and opportunity.

• These concepts are interrelated, impacting one another:

  • Income influences wealth accumulation.

  • Wealth enhances potential income generation.

  • Opportunity affects both income and wealth.

Importance of Income Inequality Measurement

• Income inequality is the most commonly cited measure due to the availability of income data.

• Wealth inequality and inequality of opportunity are harder to measure and quantify.

• The relationship between income inequality, wealth inequality, and opportunity inequality is crucial for understanding broader economic disparities.

Statistical Sources

• Current Population Survey (CPS):

  • A collaborative effort by the Census Bureau and Bureau of Labor Statistics.

  • The CPS provides comprehensive reports on income and poverty.

  • Recent income data reported for 2021 was published in October 2022.

Understanding Household Income

• Data on household income comes from the Annual Social and Economic Supplement (ASEC) to the CPS.

• Household definition:

  • A household includes individuals related by birth, marriage, or adoption as well as non-related individuals.

  • Critique: The household perspective may obscure income-sharing dynamics found in families.

• Household income is not adjusted for size or composition, raising concerns about accuracy in comparisons.

Equivalence Adjustment

• The Census Bureau provides some data using equivalence adjustment to account for household size and composition.

• Larger households require more income to maintain similar living standards.

  • Household composition analysis shows that more adults can potentially create more income.

Components of Money Income

• Money income includes:

  • Earnings, unemployment compensation, social security, pensions, disability benefits, etc.

• Missing from the measurement:

  • Noncash benefits (e.g., food stamps, health insurance) which may underestimate actual income for poorer households.

  • Capital gains are not included, raising further concerns about income statistics.

Capital Gains

• Definition: Income from selling an asset above its purchase price.

• Example: If Sam buys shares for $40 each and sells them for $50, his capital gain is $10,000.

• Taxation: Capital gains are taxed differently than ordinary income.

• Households with higher income are more likely to experience significant capital gains.

The Controversy of Income Inequality

• Income inequality is politically charged; varying definitions impact policy debate.

• If prevailing measures underestimate inequality, addressing it becomes more urgent.

Measuring Income Inequality

• Methods include:

  • Median Income: Represents the midpoint of income distribution.

    • 2017 median income for all households: $61,372.

    • Median incomes for specific demographics include:

      • Married couple households: $90,386

      • Female householder: $41,703

      • Male householder: $60,843

      • Non-family households: $36,650

  • Income Distribution by Quintile: Divides households into 20% shares based on income.

The Gini Coefficient

• Definition: A numerical measure of income inequality based on the Lorenz curve.

• Calculation: Gini coefficient = A / (A + B); A is the area between the line of equality and the Lorenz curve.

• Gini index for the U.S. in 2021 was 0.493, indicating growing inequality.

• Historical trends indicate rising wealth disparity since the late 1960s.

Wealth Disparities Over Time

• Median Family Wealth:

  • 2016: Upper class $848,400, Middle class $115,200, Lower class $11,300.

  • 2001: Upper class $636,000, Middle class $144,600, Lower class $20,600.

  • 1983: Upper class $344,100, Middle class $102,000, Lower class $12,300.

• Wealth is categorized by income tiers based on size-adjusted income from the Pew Research Center.

Public Perception of Economic Inequality

• A majority of Americans acknowledge excessive economic inequality.

• However, less than half prioritize it as a major issue needing urgent action.

Introduction to Income Inequality

Economic inequality encompasses differences in income, wealth, and opportunity, which can significantly impact overall economic stability and social mobility. Understanding these concepts requires acknowledging their interrelatedness:

• Income influences wealth accumulation because higher earnings can lead to savings and investments that build wealth over time.

• Wealth, in turn, enhances potential income generation through investments, property, and financial returns that create additional income streams.

• Opportunity, including access to education and job prospects, affects both income and wealth, creating disparities that can perpetuate cycles of poverty or wealth.

Importance of Income Inequality Measurement

Income inequality is the most commonly cited measure due to the availability of comprehensive income data from various sources. In contrast, wealth inequality and inequality of opportunity are harder to measure and quantify effectively.

• The relationship between income inequality, wealth inequality, and opportunity inequality is crucial for understanding broader economic disparities and formulating policies to address them.

• Failing to recognize these interconnected elements may result in incomplete analyses and misguided economic policies.

Statistical Sources

Current Population Survey (CPS)

• The CPS is a collaborative effort by the Census Bureau and Bureau of Labor Statistics and provides in-depth reports on income and poverty trends.

• It offers a wealth of data, with recent income data for 2021 published in October 2022, reflecting ongoing trends in economic inequality.

Understanding Household Income

Data on household income comes from the Annual Social and Economic Supplement (ASEC) to the CPS. The definition of a household can be quite broad:

• A household includes individuals related by birth, marriage, or adoption as well as non-related individuals living together.

• However, this perspective may obscure critical income-sharing dynamics found in families, where financial resources are often pooled.

• Notably, household income figures are not adjusted for size or composition, which raises concerns about accuracy in comparisons across households of different sizes.

Equivalence Adjustment

The Census Bureau provides some data using equivalence adjustments to account for household size and composition.

• Larger households typically require more income to maintain similar living standards compared to smaller ones.

• Analyzing household composition shows that more adults present can potentially contribute to income generation, which is vital in understanding economic well-being across varying household types.

Components of Money Income

Money income includes various income sources:

• Earnings from employment, unemployment compensation, social security, pensions, and disability benefits represent the primary elements of money income.

• However, the measurement often excludes noncash benefits, such as food stamps and health insurance, which can underestimate the actual income for poorer households and those receiving significant social benefits.

• Furthermore, capital gains are not included in these income statistics, raising concerns about the overall accuracy of reported income data.

Capital Gains

• Definition: Capital gains refer to income derived from selling an asset above its purchase price. For example, if Sam buys shares for $40 each and sells them for $50, his capital gain is $10,000 if he sells 1,000 shares.

• Taxation: Capital gains are taxed differently than ordinary income, often at a lower rate, which can disproportionately benefit higher-income households that are more likely to experience significant capital gains transactions.

The Controversy of Income Inequality

Income inequality is a politically charged issue; varying definitions and methods of measurement can significantly impact policy debate and public perception.

• If prevailing measures underestimate the extent of inequality, it escalates the urgency of policy interventions to address these disparities.

Measuring Income Inequality

Several methods exist to gauge income inequality:

• Median Income: Represents the midpoint of income distribution. The 2017 median income for all households was $61,372, providing a benchmark for comparison.

  • Median incomes for specific demographics include:

    • Married couple households: $90,386

    • Female householder (no husband present): $41,703

    • Male householder (no wife present): $60,843

    • Non-family households: $36,650

• Income Distribution by Quintile: This method divides households into 20% shares based on income, allowing for a clearer picture of income distribution across different economic classes.

The Gini Coefficient

• Definition: The Gini coefficient is a numerical measure of income inequality derived from the Lorenz curve, which illustrates the distribution of income across a population.

• Calculation: The Gini coefficient is calculated using the formula Gini coefficient = A / (A + B), where A is the area between the line of equality and the Lorenz curve, and B is the area beneath the Lorenz curve.

• Recent data indicated a Gini index for the U.S. in 2021 of 0.493, suggesting a notable increase in inequality compared to historical data.

Wealth Disparities Over Time

• Median Family Wealth data shows stark contrasts across income classes:

  • 2016: Upper class $848,400, Middle class $115,200, Lower class $11,300.

  • 2001: Upper class $636,000, Middle class $144,600, Lower class $20,600.

  • 1983: Upper class $344,100, Middle class $102,000, Lower class $12,300.

• Wealth is categorized by income tiers based on size-adjusted income from research by the Pew Research Center, highlighting widening disparities across generations.

Public Perception of Economic Inequality

A majority of Americans acknowledge the existence of excessive economic inequality.

• Despite this awareness, less than half prioritize it as a major issue requiring urgent action, suggesting a gap between recognition and policy advocacy that needs to be addressed in future discussions about economic reform.