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Income Inequality

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By softwareNerd from Software Nerd,cross-posted by MetaBlog

Lots of people decry the supposed inequality of income in the U.S., and claim that the gap between the rich and the poor is increasing. For instance, one web-site says the following:

The top 1 percent of Americans received 21.2 % of all personal income in 2005... a big jump from 2004, when the top 1 percent's share was 19 %, and slightly above the 2000 figure of 20.8 %

The bottom 50 percent of Americans got 12.8 %..., down from 13.4 % in 2004 and 13 % in 2000.

The problem with this type of analysis is that it is not measuring the same people. Those who were the "top 1%" in 2000 are not the same as those who are the top 1% in 2005. The same for the bottom 50%.

The bottom 50% in any year consists of many people who are earning less for some temporary reason. The analysis above was done from tax-returns. Many of those in the lower 50% were fresh out of college in the first few years of their career. When we look at the lower 50% from 2005, many of the 2000 folk have moved into the upper 50%.

The figures expressed this way can only be of interest to those who are interested in equality as a primary; but egalitarianism in the aggregate is simply pointless. If one wished to figure out whether individuals are truly able to work hard and increase their incomes, then the way to do that is to follow a fixed group of people, from various income groups, across a series of years. This would give one a picture of if and how people are able to progress economically.

The WSJ (Nov 12th, 2007) reports on one such study, that tracked over 90,000 from 1996 through 2005. Here are some of their findings:

  • The lowest 20% group, were earning 90% more in 2005 than they did in 1996
  • Over half of those in the lowest 20% group of 1996 had moved to higher quintiles, with almost 25% moving above the median
  • From the second-lowest quintile, 17% moved down, but over 50% moved to a higher quintile

The article has more.

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  • 6 months later...

In an interesting twist to the income-inequality discussion, two University of Chicago economists say that price-rise for the typical the lower-income basket of goods has not been as much as the price-rise for the typical high-income goods. The cause: China and Wal-Mart.[HT: Freakonomics]

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Here is why people think it is bad: Marxists and other 'market' statists equate economic power with political power. If equality before the law is necessary (and it is), they come to the erroneous conclusion that equality of income is necessary.

I think the point Inspector is making is extremely important. Tracking income groups tells us nothing about individuals and, ultimately, tells us nothing about the ability to compete in an economy. During a coffee house discussion I brought up the fact that most people who are measured in the lowest income groups aren't there a short time later. I was met with outright denial. I simply said "it's true, and I think you'll be surprised once you see the figures."

Edit: clarity/grammar

Edited by FeatherFall
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I think the point Inspector is making is extremely important. Tracking income groups tells us nothing about individuals and, ultimately, tells us nothing about the ability to compete in an economy. During a coffee house discussion I brought up the fact that most people who are measured in the lowest income groups aren't there a short time later. I was met with outright denial. I simply said "it's true, and I think you'll be surprised once you see the figures."

Playing the role of the devil's advocate, how much of the movement between income groups is a function of age? 15 years ago I was a recent college graduate working a part-time job for eight bucks an hour. Now I make six figures. I've definitely changed income quintiles in that period, simply through career advancement. But (and this is the interesting thing from a class mobility perspective) the quintile I'm settling into is the same one that my parents were in. So what we see here is a case where your metric would indicate mobility, but in a sense I've been in the same economic class as my parents all along.

In effect, income for a member of a given economic class follows an arc through time, and changes in income that are caused by that arc should be ignored when trying to measure mobility between economic classes.

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Kyle, I don't know how you'd do this. If you adjust the measurement to compensate for age, what happens to the income bracket? It seems to me that the lowest income groups would appear to be earning more wealth, and the highest earning less (because as people age, they tend to make more money). While I think this measurement adjustment would lend support to the idea that income is more equal, I don't see how it is useful.

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  • 3 years later...

the argument by supporters of this idea is that income inequality can lead to social instability. Particularly income disparity is socially destabilizing and often this phenomenon is attributed to the disappearance of the middle class in the United States. Other examples that supporters point to is the current economies of most central and south american countries with large income inequality gap.

Edited by Mikee
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