9.5 – Income Inequality: Measurement and Causes
Learning Objectives
- Explain the distribution of income, and analyze the sources of income inequality in a market economy
- Measure income distribution in quintiles
- Calculate and graph a Lorenz curve
- Show income inequality through demand and supply diagrams
Poverty levels can be subjective based on the overall income levels of a country. Typically a government measures poverty based on a percentage of the median income. Income inequality, however, has to do with the distribution of that income, in terms of which group receives the most or the least income. Income inequality involves comparing those with high incomes, middle incomes, and low incomes—not just looking at those below or near the poverty line. In turn, measuring income inequality means dividing the population into various groups and then comparing the groups, a task that we can be carry out in several ways, as the next Clear It Up feature shows.
Clear It Up
How do you separate poverty and income inequality?
Poverty can change even when inequality does not move at all. Imagine a situation in which income for everyone in the population declines by 10%. Poverty would rise, since a greater share of the population would now fall below the poverty line. However, inequality would be the same, because everyone suffered the same proportional loss. Conversely, a general rise in income levels over time would keep inequality the same, but reduce poverty.
It is also possible for income inequality to change without affecting the poverty rate. Imagine a situation in which a large number of people who already have high incomes increase their incomes by even more. Inequality would rise as a result—but the number of people below the poverty line would remain unchanged.
Why did inequality of household income increase in the United States in recent decades? A trend toward greater income inequality has occurred in many countries around the world, although the effect has been more powerful in the U.S. economy. Economists have focused their explanations for the increasing inequality on two factors that changed more or less continually from the 1970s into the 2000s. One set of explanations focuses on the changing shape of American households. The other focuses on greater inequality of wages, what some economists call “winner take all” labour markets. We will begin with how we measure inequality, and then consider the explanations for growing inequality in the United States.
Measuring Income Distribution by Quintiles
One common way of measuring income inequality is to rank all households by income, from lowest to highest, and then to divide all households into five groups with equal numbers of people, known as quintiles. This calculation allows for measuring the distribution of income among the five groups compared to the total. The first quintile is the lowest fifth or 20%, the second quintile is the next lowest, and so on. We can measure income inequality by comparing what share of the total income each quintile earns.
U.S. income distribution by quintile appears in Table 9.5a. In 2011, for example, the bottom quintile of the income distribution received 3.2% of income; the second quintile received 8.4%; the third quintile, 14.3%; the fourth quintile, 23.0%; and the top quintile, 51.14%. The final column of Table 9.5a shows what share of income went to households in the top 5% of the income distribution: 22.3% in 2011. Over time, from the late 1960s to the early 1980s, the top fifth of the income distribution typically received between about 43% to 44% of all income. The share of income that the top fifth received then begins to rise. Census Bureau researchers trace, much of this increase in the share of income going to the top fifth to an increase in the share of income going to the top 5%. The quintile measure shows how income inequality has increased in recent decades.
Year | Lowest Quintile | Second Quintile | Third Quintile | Fourth Quintile | Highest Quintile | Top 5% |
---|---|---|---|---|---|---|
1967 | 4.0 | 10.8 | 17.3 | 24.2 | 43.6 | 17.2 |
1970 | 4.1 | 10.8 | 17.4 | 24.5 | 43.3 | 16.6 |
1975 | 4.3 | 10.4 | 17.0 | 24.7 | 43.6 | 16.5 |
1980 | 4.2 | 10.2 | 16.8 | 24.7 | 44.1 | 16.5 |
1985 | 3.9 | 9.8 | 16.2 | 24.4 | 45.6 | 17.6 |
1990 | 3.8 | 9.6 | 15.9 | 24.0 | 46.6 | 18.5 |
1995 | 3.7 | 9.1 | 15.2 | 23.3 | 48.7 | 21.0 |
2000 | 3.6 | 8.9 | 14.8 | 23.0 | 49.8 | 22.1 |
2005 | 3.4 | 8.6 | 14.6 | 23.0 | 50.4 | 22.2 |
2010 | 3.3 | 8.5 | 14.6 | 23.4 | 50.3 | 21.3 |
2013 | 3.2 | 8.4 | 14.4 | 23.0 | 51 | 22.2 |
It can also be useful to divide the income distribution in ways other than quintiles; for example, into tenths or even into percentiles (that is, hundredths). A more detailed breakdown can provide additional insights. For example, the last column of Table 9.5a shows the income received by the top 5% percent of the income distribution. Between 1980 and 2013, the share of income going to the top 5% increased by 5.7 percentage points (from 16.5% in 1980 to 22.2% in 2013). From 1980 to 2013 the share of income going to the top quintile increased by 7.0 percentage points (from 44.1% in 1980 to 51% in 2013). Thus, the top 20% of householders (the fifth quintile) received over half (51%) of all the income in the United States in 2013.
Lorenz Curve
We can present the data on income inequality in various ways. For example, you could draw a bar graph that showed the share of income going to each fifth of the income distribution. Figure 9.5a presents an alternative way of showing inequality data in a Lorenz curve. This curve shows the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis.
Every Lorenz curve diagram begins with a line sloping up at a 45-degree angle. We show it as a dashed line in Figure 9.5a. The points along this line show what perfect equality of the income distribution looks like. It would mean, for example, that the bottom 20% of the income distribution receives 20% of the total income, the bottom 40% gets 40% of total income, and so on. The other lines reflect actual U.S. data on inequality for 1980 and 2011.
The trick in graphing a Lorenz curve is that you must change the shares of income for each specific quintile, which we show in the first column of numbers in Table 9.5b, into cumulative income, which we show in the second column of numbers. For example, the bottom 40% of the cumulative income distribution will be the sum of the first and second quintiles; the bottom 60% of the cumulative income distribution will be the sum of the first, second, and third quintiles, and so on. The final entry in the cumulative income column needs to be 100%, because by definition, 100% of the population receives 100% of the income.
Income Category | Share of Income in 1980 (%) | Cumulative Share of Income in 1980 (%) | Share of Income in 2013 (%) | Cumulative Share of Income in 2013 (%) |
---|---|---|---|---|
First quintile | 4.2 | 4.2 | 3.2 | 3.2 |
Second quintile | 10.2 | 14.4 | 8.4 | 11.6 |
Third quintile | 16.8 | 31.2 | 14.4 | 26.0 |
Fourth quintile | 24.7 | 55.9 | 23.0 | 49.0 |
Fifth quintile | 44.1 | 100.0 | 51.0 | 100.0 |
In a Lorenz curve diagram, a more unequal distribution of income will loop farther down and away from the 45-degree line, while a more equal distribution of income will move the line closer to the 45-degree line. Figure 9.5a illustrates the greater inequality of the U.S. income distribution between 1980 and 2013 because the Lorenz curve for 2013 is farther from the 45-degree line than for 1980. The Lorenz curve is a useful way of presenting the quintile data that provides an image of all the quintile data at once. The next Clear It Up feature shows how income inequality differs in various countries compared to the United States.
Clear It Up
How does economic inequality vary around the world?
The U.S. economy has a relatively high degree of income inequality by global standards. As Table 9.5b shows, based on a variety of national surveys for a selection of years in the last five years of the 2000s (with the exception of Germany, and adjusted to make the measures more comparable), the U.S. economy has greater inequality than Germany (along with most Western European countries). The region of the world with the highest level of income inequality is Latin America, illustrated in the numbers for Brazil and Mexico. The level of inequality in the United States is lower than in some of the low-income countries of the world, like China and Nigeria, or some middle-income countries like the Russian Federation. However, not all poor countries have highly unequal income distributions. India provides a counterexample.
Country | Survey Year | First Quintile | Second Quintile | Third Quintile | Fourth Quintile | Fifth Quintile |
---|---|---|---|---|---|---|
United States | 2013 | 3.2% | 8.4% | 14.4% | 23.0% | 51.0% |
Germany | 2000 | 8.5% | 13.7% | 17.8% | 23.1% | 36.9% |
Brazil | 2009 | 2.9% | 7.1% | 12.4% | 19.0% | 58.6% |
Mexico | 2010 | 4.9% | 8.8% | 13.3% | 20.2% | 52.8% |
China | 2009 | 4.7% | 9.7% | 15.3% | 23.2% | 47.1% |
India | 2010 | 8.5% | 12.1% | 15.7% | 20.8% | 42.8% |
Russia | 2009 | 6.1% | 10.4% | 14.8% | 21.3% | 47.1% |
Nigeria | 2010 | 4.4% | 8.3% | 13.0% | 20.3% | 54.0% |
Watch It!
Watch the video to see illustrated data on the distribution of wealth in the United States.
Watch A look at income inequality in the United States | TIME (3:30 minutes) on YouTube
Video Source: TIME. (2020, February 20). A look at income inequality in the United States | TIME [Video]. YouTube. https://youtu.be/qc7g6Uhi1i4
Causes of Growing Inequality: The Changing Composition of American Households
In 1970, 41% of married women were in the labour force, but by 2015, according to the Bureau of Labor Statistics, 56.7% of married women were in the labour force. One result of this trend is that more households have two earners. Moreover, it has become more common for one high earner to marry another high earner. A few decades ago, the common pattern featured a man with relatively high earnings, such as an executive or a doctor, marrying a woman who did not earn as much, like a secretary or a nurse. Often, the woman would leave paid employment, at least for a few years, to raise a family. However, now doctors are marrying doctors and executives are marrying executives, and mothers with high-powered careers are often returning to work while their children are quite young. This pattern of households with two high earners tends to increase the proportion of high-earning households.
According to data in the National Journal, even as two-earner couples have increased, so have single-parent households. Of all U.S. families, 13.1% were headed by single mothers. The poverty rate among single-parent households tends to be relatively high.
These changes in family structure, including the growth of single-parent families who tend to be at the lower end of the income distribution, and the growth of two-career high-earner couples near the top end of the income distribution, account for roughly half of the rise in income inequality across households in recent decades.
Media Attributions
- Figure © Steven A. Greenlaw & David Shapiro (OpenStax) is licensed under a CC BY (Attribution) license
- Figure © Steven A. Greenlaw & David Shapiro (OpenStax) is licensed under a CC BY (Attribution) license
When one group receives a disproportionate share of total income or wealth than others
Percentage of the population living below the poverty line
A graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis