The limitations in the Census measurement of income distribution lead to a considerable exaggeration of income inequality. According to normal Census data, the top quintile of society in 1997 had $13.86 of income for every $1.00 received by the bottom quintile. However, if incomes and taxes are counted more completely, and if the quintiles are adjusted to contain equal numbers of persons, then the ratio of the incomes of the top to the bottom quintile drops to $4.23 to $1.00. Moreover, the remaining difference is due in a large part to the fact that working age adults in the top quintile work almost twice as many hours, on average, as those in the bottom quintile. If such adults worked the same number of hours, the ratio of incomes would fall to around $3.18 to $1.00.

Differences in income in the United States are the natural result of vast differences in ability and behavior between individuals. In general, those persons at high income levels tend to be married, to work large numbers of hours per year, to have high levels of skill and productivity, and to provide higher levels of savings and investment necessary to sustain the overall prosperity of the economy. By contrast, individuals in the lowest income quintile tend generally to be non-married, to work little, and to have lower levels of skill and productivity. Despite these factors, the average per capita income within the bottom quintile remains over $8,000 per year, which is slightly higher, in inflation-adjusted terms, than the average per capita income in the whole society at the beginning of World War II. [Rector and Hederman] 

Some claim that the lower quintiles represent a permanent underclass. Others say this is not true because mobility (the movement of people from one quintile to another over their lifetimes) has been rising, and "Substantial income mobility, observed in every examination of longitudinal data tracking individuals over time, means that the composition of quintiles changes from year to year." [Congressional Budget Office, Chapter One] [3]

Most Americans do not start off in a high income bracket. They work up to it over the years and reach a peak somewhere in their 50s or 60s. That is where most of the high income and most of the wealth in the country is. Census statistics for 1990 show families headed by someone in the 45 to 64 year old bracket earning nearly double the income of families headed by someone in the 25 to 34 year old bracket.

When it comes to wealth, the disparity is even greater. Census data show the net worth of households headed by someone in the 55 to 64 year old bracket to be several times that of households headed by someone under 35.

Most of the people who are called "the rich" could more accurately be called middle-aged or elderly. They are not a class. They are an age bracket. When they were younger, they were usually in a lower income bracket. [Sowell]

Table Three

Mean Family Income by Age of Householder

2000

Source: United States Department of the Census. "Table F11: Age of Householder - Families by Median and Mean Income, 1947 - 2000"  http://www.census.gov/hhes/income/histinc/f1.1.html

Table Four

Median Age in the United States

Table Five

Changes in the Relative Sizes of Each Householder Age Group

1970 to 2000

In 1970 the Boomers were in the 15 to 24 year-old age group. In 2000 they were in the 35 to 44 and the 45 to 54 year-old age groups. Their children, born when the birth rate was low, were in the 15 to 24 year-old age group. So, the Boomers caused the 15 to 24 year-old age group to be relatively larger in 1970 than in 2000 and the 35 to 54 year-old age groups to be relatively larger in 2000 than in 1970. The low birth rates during the Great Depression and the post-boomer low birth rates caused, respectively, the relative shrinkage in the size of the 25 to 34 and the 55 to 64 age groups in 2000. The high post-World War I birth rates and people living longer caused the relative size of the 65 and older group to increase from 1970 to 2000. Table Three (above) shows that in 2000 the highest family incomes were those where the householder was from 35 to 54 years old. (The 35 to 54 year-old groups also had the highest incomes in 1970.)

The bottom 20 percent in the wealth distribution are mostly young. About two-thirds of them are single, and more than one-third of them did not finish high school. Many are non-white. John C. Weicher is among those who suspect that over time there is substantial change in the composition of both this and the wealthiest group.

If most wealth was inherited and in the hands of a small minority of the population, and most of those with little or no wealth were middle-aged college graduates, there would be no doubt that  the unequal distribution of wealth was a really big problem. Some do not doubt that the actual situation is a significant problem.

Woodrow Ginsburg, for example, complains that "Because of the extremely unfair distribution of the nation's growth from 1979 through the early 1990s, income inequality widened so greatly that the current gap between the richest and the poorest is larger than it has been since the Depression years of the 1930s." This contrasts with the 1950 to 1978 period when "... real income (income adjusted for inflation) increased for all groups--from the poorest fifth (quintile) to the richest fifth (quintile). The gain for the lowest fifth was 138%; for the second fifth, 98%; for the middle and fourth fifths slightly over 100%; and for the top fifth, 99%." [Ginsburg]

While some on the left side of the economic/political/social spectrum like Ginsburg, an Americans for Democratic Action (ADA) official, believe that it is unfair for people's incomes to be unequal, others think it is unfair for people to receive the same income for different work and question whether without the incentive of a higher income that people would work as hard or as well. Some jobs take more out of a person than others do. A police officer's job is far more dangerous than is that of a police dispatcher. The job of a store manager is more stressful than that of a stock clerk. To be qualified to handle some jobs requires far more costly preparation than it does for others. Far more education is required to be a surgeon than to be an orderly. 

Richard B. Freeman says that we should be concerned by rising income inequality because "Falling or stagnating incomes for most workers and rising inequality threaten American ideals of political 'classlessness' and shared citizenship. Left unattended, the new inequality threatens us with a two-tiered society...in which the successful upper and upper-middle classes live lives fundamentally different from the working classes and the poor. Such an economy will function well for substantial numbers, but will not meet our nation's democratic ideal of advancing the well-being of the average citizen. For many it promises the loss of the 'American dream.'" [Freeman] (Was little or no income inequality the dream of the Founding Fathers or even Abraham Lincoln?)

Freeman's reasons for being concerned about rising income inequality are not economic in nature. The usual economic argument against income inequality relies on utility theory. Utility theory postulates that money is subject to diminishing marginal utility, that is, an additional dollar is worth less to a rich man than a poor man. As a result, the total utility enjoyed by society as a whole will be increased if this dollar is taken away from the rich man and given to the poor man.

Economic Growth: Inequality's Product or Its Downfall?

Freeman doesn't think there is anyone who believes that, by providing an incentive to work harder and better, income inequality promotes economic growth.  "No one argues," he says, "that we need more inequality to generate work effort or economic growth. To the contrary, most recent economic studies suggest that inequality is harmful to growth." He expresses surprise over the fact that rising income inequality has taken place in the U.S. during a period of time in which both the number of hours worked and job creation well exceeded that experienced in Western Europe, where income inequality was less.

Mark D. Partridge differs with Freeman in regard to the relationship between income inequality and economic growth. He observes that, as Freeman has noted, "...virtually all of the advanced economies, led by the United States and the United Kingdom, have experienced increased income inequality since 1980." However, Partridge contends that "The Gini coefficient results suggest that states with more income inequality at the beginning of the period actually experience greater subsequent economic growth..." [Partridge]  

The United States has a more flexible labor market than do Western European countries, who have higher unemployment benefits and minimum wages and various job protection measures not present in the United States. Job creation and economic growth has been much greater in the U.S. Some believe that more income inequality is its cost. ( To reduce income inequality while promoting job creation, the U.S. government offers wage subsidies.)

Based on their study of the U.S. and Germany, Daly, Crews, and Burkhauser believe that "...even in countries committed to guaranteeing a minimum level of well-being and spreading the benefits of economic growth to all citizens, the benefits of economic expansion are likely to be unevenly distributed." [Daly]

Proponents of the government taking action to reduce income inequality sometimes claim that "Policies that promote equity can increase social cohesion and reduce political conflicts. To be effective, most policies require broad political support, which is more likely to be forthcoming when the distribution of income is seen as fair." [Anonymous 2]

Proposals To Reduce Income Inequality

The only logical way to formulate policies other than income redistribution by the government that will halt and/or reverse rising income inequality is to determine what is causing it to rise. Rising income inequality has been attributed to a variety of causes. Hypothesized causes include such things as immigration, foreign trade, new technology, high taxes, excessive government regulation, declining unionism, the unequal distribution of wealth, and a decline in the real value of the minimum wage. [5] The nature of some of these hypothesized causes makes obvious some possible solutions: eliminate or reduce immigration; restrict imports; raise the minimum wage; and have the government promote unionism as it did in the 1930s. 

Arguments can be mounted against all these proposals. Raising the minimum wage, for example, is said to make some people--mainly poorly-educated young people without job experience--unemployable because they aren't worth that much. It is also claimed that raising it will cause employers to replace several unskilled workers with one skilled worker or automate jobs formerly performed by unskilled workers. 

Higher tariffs on imports levied to reduce them will raise the prices poor people have to pay for both domestic and imported goods. Rather than shift to jobs where they will be more productive and more highly paid, workers will remain employed in inefficient industries that are able to survive because they are protected from foreign competition. 

Despite their differing beliefs about the cause of rising income inequality, Krugman and Thurow believe that it could be reduced by the strengthening labor unions, taxing the rich to finance subsidies for the poor, and providing everyone with an education that will make them highly skilled. Since at least in the foreseeable future there will be jobs that require little or no skill, causing everyone to be highly skilled would seem to create a problem, as people tend to dislike working in jobs beneath their ability.

Conclusions

Considering the enormous size of the incomes of people like Warren Buffet, Bill Gates, and Ted Turner, or even the less lofty incomes of sports stars like basketball super star Michael Jordan, and that probably very few people believe that this much money is necessary to induce them to do what they do or that they are worth that much more to society than, say, your average physician, it is not at all surprising that there is outrage over the amount of the nation's income concentrated in the hands of people like them.

Measuring income and its distribution is less distant from being an exact science than is economic forecasting, but it is clear that there are problems in terms of the accuracy, adequacy, and appropriateness of the various measures of income that are used as a proxy for the material well being of the American people. [6] 

It is clear that changes in wide variety of factors cause the distribution of income to become less equal. At best, the government probably could have prevented only a very few of them from taking place. Even if the government does nothing, inequality is not likely to increase indefinitely, because it has fluctuated in the past, and there is good reason to think that this will continue to be the case.  Forecasting very accurately the costs and benefits of the things the government can do to alter the distribution of income is difficult. So the government should tread very carefully in this economic minefield.

Implied by some is that any increase in the inequality of income is bad. This can only be justified on a normative basis. People who believe that there is one "right" distribution of income, and that is not the distribution that now exists, will believe that we have a problem. If they believe that the distribution of income is changing in the wrong direction, they will, of course, believe that this problem has gotten worse. The solutions they propose will depend on their economic/political/social philosophy and/or, possibly, their self-serving interests. [7]

1. Data is not collected on an individual basis because people with little or no income nay have a high standard of living because they are supported by other members of their family or household.

2. Note that in Figure One that households are people who share a single housing unit, regardless of the relationships among them, and that after-tax household income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, retirement benefits, and in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Figure Two subtracts from this individual income taxes, excise taxes, and the employee's share of payroll taxes.  

3. Mobility is higher in the United States than in other industrialized countries. In these countries there is less income inequality than in the United States. 

4. When, one wonders, did we have the right amount of income inequality? Or is there any "right" level? (Not according to Karl Marx!)

6. One of the inadequacies is that income alone isn't enough to measure well being. An interesting point Wanniski makes about this subject is that: "If you own a $100,000 bond that pays 7 percent a year, you will have an annual income of $7,000 for the life of the bond. If you are entitled to a government check to cover your Medicare bill of $35,000 a year, for the rest of your life, you have wealth that is the equivalent of $500,000." [Wanniski] (Note also)

7. For example: Congress men and women may vote to subsidize low income people to alleviate poverty and/or to buy votes. Congress men and women may vote to reduce the marginal tax rate on high incomes to induce people to work harder and invest more and/or to reward contributors to their campaign.