Inequality.org

connecting the dots on a growing divide

U.S. Income Distribution: Just How Unequal?

With inequality now a front-page issue, the stats that measure inequality have taken on a new importance. And no inequality stat has a longer pedigree — or more confusion surrounding it — than the ‘Gini coefficient.’

By Salvatore Babones

Levels of income inequality in America today are running at record levels. Activists from the Occupy movement have placed rising inequality firmly on the national agenda, and inequality looks to figure prominently in the 2012 election campaigns.

The Gini coefficient was first defined in a 1912 paper by an Italian economist.

All this makes inequality statistics suddenly newsworthy, but how do statisticians measure something as slippery as inequality? Some people obviously have more than others, but how does that difference translate into numbers that represent the level of inequality for an entire society?

Anyone following the inequality debate so far has probably heard of the Gini coefficient. America’s Gini coefficient is 46.9. Or 37.0. Or maybe as high as 57.4. Really, it depends who you ask.

The Gini coefficient was first defined in a 1912 paper by the Italian economist Corrado Gini (1884-1965). The coefficient measures the degree the degree of concentration in a country’s income distribution. Social statisticians today use many different inequality measures, but none more than the Gini coefficient.

The Gini coefficient amounts to a kind of percentage and can run from 0 to 100. A Gini of 0 represents 0 percent concentration in a country’s income distribution. In a country with a Gini coefficient of 0, everyone receives exactly the same income.

A Gini coefficient of 100 represents 100 percent concentration in a country’s income distribution. In a country with a Gini of 100, one person receives all of the country’s income. Everyone else gets nothing.

The official Gini coefficient for the United States has shot way up from the all-time low set in 1968.

In between 0 and 100, Gini coefficients are harder to interpret. A Gini coefficient of 50 represents 50 percent concentration in a country’s income distribution. What does it mean to have 50 percent concentration in a country’s income?

A Gini of 50 could mean that half the people share all of the income while the other half get nothing. In other words, a country that literally consisted of haves and have-nots in a 50-50 split would have a Gini coefficient of 50.

This scenario, of course, isn’t very realistic. Everyone, no matter how poor, has to have some income to live. There are no literal have-nots.

We could also have a Gini coefficient of 50 with the top 10 percent of a country’s population very well-off, the next 50 percent more or less equal, and the bottom 40 percent very poor.

With some fiddling around the edges, that’s more or less the situation in America today.

According to the Census Bureau, the official Gini coefficient for the United States was 46.9 in 2010, the most recent year with data available. This is way up from the all-time low of 38.6 set in 1968.

Income inequality statistics can differ depending on how income is defined.

Gini coefficients can be used to measure the concentration of any distribution, not just the distributions of income. Higher concentrations translate into higher inequality. Lower concentrations mean lower inequality.

For example, wealth inequality in America runs much higher than income inequality. New York University economist Edward Wolff estimates the Gini coefficient for household wealth — net worth — in the United States to be 86.5, based on 2009 data. That’s much higher than any income inequality estimate.

Leaving aside wealth and other forms of inequality, even income inequality statistics can differ depending on how income is defined.

The most common definition of income used by the Census Bureau and other statistical agencies is total money income of a household, excluding capital gains. All of the members of a household are assumed to share in the household’s combined income.

Household income includes wages, salaries, interest, dividends, alimony payments, child support, Social Security payments, and any other cash transfers. It doesn’t include food stamps, Medicare, or other non-cash benefits.

A major gap in the measurement of income inequality is the exclusion of capital gains, profits made on increases in the value of investments. Capital gains are excluded for purely practical reasons. The Census doesn’t ask about them, so they can’t be included in inequality statistics. 

Real levels of income inequality in America run much higher than the official Census Bureau figures would suggest.

Obviously, the rich earn much more from investments than the poor. As a result, real levels of income inequality in America are much higher than the official Census Bureau figures would suggest.

Edward Wolff, working with Federal Reserve Board data that included capital gains, but not government transfer payments, put the figure at 57.4 for 2006.

How does America’s Gini coefficient compare to those of other countries? Comparative data on income inequality are reported by the Organisation for Economic Cooperation and Development.

The OECD reports three different Gini coefficients for the United States and other countries (see accompanying table). The first covers the Gini coefficient for wages earned from work. The second traces overall income inequality. The third measures inequality in total living standards, including government-provided health and education benefits.

According to the OECD, the Gini coefficient for income inequality in the United States is just 37.0. The OECD is highly secretive about its methodologies, so it’s impossible to know why this is so different from the official figure of 46.9 reported by the U.S. Census Bureau.

Whatever exact procedures the OECD uses, it claims to use the same procedures for all countries. According to the OECD, the Gini coefficient for wages is highest in Italy (46.5) and the United Kingdom (45.6). The United States comes in third-highest out of the 18 developed countries for which data are available.

Including the value of government-provided health and education benefits makes the United States look even more unequal compared to other developed countries.

After other sources of income are included, however, the United States is by far the most unequal of all 18 countries. The United States (37.0) is well ahead of number two Portugal (34.7) and number three United Kingdom (34.5).

The United States scores worse mainly because Social Security, unemployment insurance, and other cash benefits in the United States contribute much less to income than comparable programs in other countries.

Including the value of government-provided health and education benefits makes the United States look even more unequal compared to other developed countries. In this final comparison the U.S. Gini coefficient (30.3) is still worse than number two Portugal (29.1) and far worse than number three Italy (26.2) and all other developed countries.

By this last measure, the most equal countries in the world are the usual suspects: Denmark (19.4), Norway (19.3), and Sweden (18.1).

So is America’s Gini coefficient 46.9 (Census Bureau), 37.0 (OECD), or 57.4 (Edward Wolff based on Federal Reserve data)? It depends what you mean by income. If by income you mean all the money that households get from all sources, including both government transfers and capital gains, then it’s probably around 50, give or take a point.

So we’re right back to the haves and have-nots. That we’re a society of haves and have-nots may not be literally true, but it’s more than just a metaphor. America is suspended roughly half-way between full equality and a situation in which all of the country’s income is concentrated in one person’s hands.

In other words, we’re half-way between a socialist utopia and an absolute monarchy. America in 1968 was hardly a socialist country, but it was much closer to the utopia. Maybe it’s time to turn back the clock on income inequality. Utopia doesn’t sound so bad.

  • http://www.facebook.com/people/Jerome-Bigge/100003095962760 Jerome Bigge

    The USA is probably the worst country of all developed countries to be a poor person.  On the other hand a rich person would probably pick the USA over all other developed countries.  The poor are treated the worst here and the rich are treated the best.

    If people could move freely between any developed country, the US population would  probably fall to about a third of what it is today.  Since except for the rich, you are better off living most anywhere else in the developed world than in the USA.  The concept of USA “exceptionalism” only applies if you are a rich person.  Otherwise you’re better off elsewhere in most any developed country (with the exception of Greece) which isn’t shown on this listing.

    Of course the USA could be “fixed”, but the rich wouldn’t like it and their political party, “The National Social Darwinist Rich Peoples’ Party” aka the Republican Party wouldn’t allow it to happen short of their forcible overthrow in a violent revolution.

    • The Pulpit

      The US also has the most obese poor people in the world.  So they are not staving like in Subsaharan Africa.

      Comments?

      • http://www.facebook.com/JOSEISSUPERCOOL Jose Manuel Tobar

        Because -_____- McDonald’s is fucking cheap…honestly it’s less than 5 dollars for a 1,500+ calorie meal…that’s why…you think a poor person who works even has time to cook a real meal? no they don’t and they’re too tired to do so.

        EDIT: Just in case you didn’t know, here in the USA, there’s a McDonald’s on every fucking corner.

      • http://twitter.com/conicaldream Mister África

        being obese has nothing to do with good nutrition, a person can be obese by eating empty calories (cause are the cheapest) and lack of essential nutrients and thus be starving biologically speaking

    • Shells

      The average poor person in America has more wealth than the average European. Yes, that sentence means exactly how it reads: The average POOR person in America is better off than the AVERAGE European.

      Check your facts.

      • essbird

        By whose measure? The decidedly nonpartisan Heritage Foundation? That’s the only place I find it. I can’t find any independent, credible source to back up your claim.

      • http://twitter.com/963cafila Koizumi-chan

        You ignore a fact. The average poor person in these both countries or continent if you may cannot live with the salary they are making. 20 U.S dollars is not equivalent to 20 Euro.

  • http://www.facebook.com/ThinkerGoneMad Shameka Robinson

    I live in the US and I would leave in a heartbeat…

    • J Smith

      Delta is ready when you are……Buy a ticket and leave..

      • http://twitter.com/963cafila Koizumi-chan

        I like that J.

    • Karsten Engelmann

      PLEASE GO YOU AMERICA HATER!

      • Shameka Robinson

        I hate America because I want to live abroad? Please explain that logic…

        • Karsten Engelmann

          Uh, with all do respect, saying you live in America and would leave in a heart beat – rather than trying to stay and FIX america tells me you are a quitter or hater. Now, I think you are probably an intelligent and hard working woman, so that leaves a person who hates the US so much thay want to leave in a heartbeat. Perhaps you did not mean to say what you said…

          • Shameka Robinson

            I meant what I said, I did not intend for it to be taken as you received it. I love my country. I try to bring about as much positive change as a single bleeding heart can, but sometimes I imagine the grass may be greener on the other side and I wouldn’t hesitate at the opportunity to check it out. Thank you for replying! Please enjoy your weekend. :)

          • Peter Deepinsky

            If most people in the US are descendants of immigrants, that means at some point in our family histories someone said, “Screw this! I’m outta here!”. Obviously, they decided to run away from their problems and not stay and FIX the country they once resided in. Aside from most African-Americans (not sure what term to use for people who arrived from Africa in the past 30 years or so, sorry. :( ) and Native Americans, we’re descended from quitters and haters. My father is a quitter and hater; people who come here to flee oppressive regimes or seek opportunities that are not available in their homelands, are also, obviously, quitters and haters.

            There is bravery and courage in fighting overwhelming odds for a good cause; there is also wisdom in realizing that the battle is over. Regardless of the choice you make, best of luck to you.

  • benleet

    The yearly income of about 50 million U.S. households (out of a total of 120 million) is equal to the income of 1 million households. The wealth of about 100 million households is equal to the wealth of 1 million. Talking about inequality is difficult to convey in a meaningful way, and the Gini is the most difficult and ineffective way. This next sentence comes from a Congressional Budget Office report: “The Gini index for market

    income was 0.590, and the Gini index for after-tax income was 0.483.” This is from the CBO report “Trends in the Historical Distribution of Income between 1979 to 2007″, Appendix B. This report has a long section on the Gini. It shows the top 1% gained income share over the 28 year period, increasing from 8% of all income to 17% post-tax and post-transfer income. In a recent comment elsewhere I proposed to tax 12% of the income of the top-earning 1% and apply it to government jobs creation. What would that mean? It would reduce the income of the 1% by about $200 billion which would then be applied to employ 5 million unemployed and reduce the unemployment rate to around 4%. Since the income of the 1% was about half their present income 30 years ago, this would not diminish their income much. What does one remember with the Gini index number? Not much. It works as a comparison between countries. It’s better to state facts in terms people can recognize. For instance the combined wage income of 75% of workers, all earning less than $50,000 a year, is less than the total personal income of the one percent. The wage earnings of half of all workers is less than 7% of total personal income. I’ve done this at my blog, http://benL8.blogspot.com. One of my favorites is: the average household owns $498,000 in assets, but the lower 50% of households own on average just $11,000 per household. No matter how you phrase it, the meaning is almost totally lost on ears that just don’t seem to care. All too often people just don’t get it.

    • qusdis

      Yeah, the Gini coefficient for the US is probably 0.54-0.59 at this point. Up there with several Third World nations.

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  • noname

    People can ‘t we fight?????? we seems to know the problems but why can’t we the people of america fight back, pls!

    • Answer

      Becaus it seems that those who want to fight are illiterate and/or uneducated.
      There is no space before an apostrophe (can ‘t); one question mark is sufficent (more usually apply for onmatopeias or very informal settings); there is no ‘s’ at the end of ‘seem’ when using the first person plural; ‘but’ cannot be used to link a statement and a question; there are two commas missing in the second part of the second ‘sentence’ seen as “the people of america” is an epithet to “we”; ‘America’ has a capital letter and is in fact should be ‘USA’ and not America; there should be a question mark at the end of the second sentence, not an exclamation mark as ‘why’ is interrogative. Finally, “pls” is a file format and has nothing to do with anything you have previously said. You may have wanted to say ‘please’ in which case the use of a ‘why’ question instead of a ‘can we’ question or a request is also incorrect.
      The level of speech and litteracy generally hints at the level of the argument. I am impressed both by the naïveness and simplicity of the argument and the sheer number of mistakes you have crammed into 20 words.

      • Grammar Nazi

        Thank you for correcting the previous mistakes, but now I feel obligated to correct yours. “Becaus” is missing an e. Furthermore, when using because to begin a sentence, it must be a complete one. The sentence you wrote to begin your comment was a fragment. The sentence was a subordinate clause and needed an independent clause to be complete.

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