Seven ways of measuring the gap between the rich, the poor and the middle-class

Seven ways of measuring the gap between the rich, the poor and the middle-class

The rich get richer, and the poor get poorer. At least that’s what’s been happening in the American economy lately, according to the experts. And it’s not just manipulative statistics, either.

Today, courtesy of Georgetown University law professor Stephen Cohen, we bring you seven ways of measuring income inequality. But no matter which way you measure it, it doesn’t look good. Except, I suppose, if you’re in the richest 1 percent.

The measures come from Cohen’s paper, Inequality and the Deficit. While his thesis really revolves around how we should fix our deficit mess, in the light of inequality, the measures of inequality he cites are pretty interesting themselves. We’ll get to the deficit tomorrow.

1) Household after-tax income

You can measure income discrepancies before taxes or after taxes, but Cohen argues it’s more accurate to take a look after taxes. After all, you can’t spend money you’re giving to Uncle Sam. This measure goes by household, not family, meaning that it’s whoever the census counts as living under the same roof but not necessarily related. Looking at 1980 to 2001, the longest period of peace time growth in our recent history, here’s what’s been going on.

If you’re under the 80th percentile for income, your share of the cash has gotten smaller. Just how much smaller has to do with how small your income was in the first place. The only percentile to do better is 80+ percentile, with 96-100 percentile gaining a whopping 29 percent.

2) Ratio of income to poverty level income

The trouble with household data is that it doesn’t take into account your family size. If you have a decent paying job, but seven children, you might not be really comparable to a family that makes the same income but has just two little ones to look after. So, there’s another way to calculate–your income compared with the poverty rate income for a family of the same size. That ratio tells us how well you’re doing economically.

The news on this one is slightly better–everyone’s incomes from 1980 to 2001 had a higher ratio when compared to the poverty level income. Everyone was making more. But how much more? If you made under the 20th percentile, only 3 percent more. The 80th percentile and above? 58 percent more. That’s a huge difference.

3) Dissecting the Super-Rich

Although the census doesn’t analyze the gains of the super rich, the Congressional Budget Office does. They compared 1979 to 2007, looking at five income quintiles and then taking apart the highest quintile, the uber-rich. The five quintiles look much like the census data–everyone’s lost ground except the highest tier. The super-rich get even more interesting, though, when you look at them up close.

Lesson: It’s good to be rich, and even better to be really, really rich. Just because I’m curious, I wanted to know what it meant to be the top 1 percent of income earners. According to the Internal Revenue Service’s 2010 data, the top 1 percent make an average of $380,354 a year. Maybe we should all be asking for a raise?

4) Family before-tax income

Economists Thomas Piketty and Emmanuel Saez took a look at what families, rather than households, are making before taxes–their actual salary, without any gouges from the government. They didn’t stop at the richest 1 percent, but looked even further at the richest 0.1 percent. As you might have guessed after reading this far, these guys are doing just fine.

“The richest 1/100th of one percent of families experienced an astonishing increase of nearly 500% in their share of total before-tax income during the period from 1968 to 2008,” wrote Cohen.

5) A Historical Perspective

Have the rich always been getting richer? No. In fact, when Cohen examines data from two periods–1947 to 1968 and 1968 to 2001–he finds an interesting trend. In the first period, after the second World War, people on the bottom were the ones gaining, and the top was losing, in terms of share of the economy. But the reverse happened between ’68 and ’01, with every sector of incomes losing ground, except for the richest.

6) Not just income but wealth

Professor Edward Wolff of New York University tackled another question related to inequality: How are families doing in terms of wealth, not just income? Wealth measures their total financial status–savings accounts, assets, investments–not just what they’re paycheck reads. He studied the difference in net worth as a share of the economy between 1983 and 2007. These results are some of the most depressing yet.

The bottom 40th percentile lost 78 percent of their economic share. If you’re wondering what percentile you fit into, according to Wikipedia, in 2004 dollars, people in the 0-20 percentile were worth an average of $72,600, and 21-39.9 were worth an average of $121,500. The wealth gap also has a lot to do with race, a hot topic of late.

7) Comparing International Inequality

The United Nations has a measure of a nation’s inequality called the Gini Co-efficient. It’s a number from 0 to 1, where 0 means perfect equality and 1 is perfect inequality. The higher your co-efficient, the more unequal your nation is in terms of income distribution.

How does the U.S. fair? Here’s a few of the world’s Gini co-efficients.

As you can see, we’re not doing so well compared to our international friends. For more on Gini co-efficients, including Chicago compared to other cities, check out this post.

There they are. Seven measures of inequality, all showing that our country is becoming less equal. Much thanks again to Stephen Cohen of Georgetown for his thorough research of the problem.

Does it matter? Does it have implications for our society? You tell us. Leave us a comment, and come back tomorrow for some more data on how this inequality may be impacting our deficit woes.

Photo credit: Taxbrackets.org

© Community Renewal Society 2011

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