Software Nerd

Tuesday, November 13, 2007

Income Inequality

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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