Why the “Rich” Get Richer Quicker than the “Poor”

Income Disparity Overblown By Official Measures: NCPA Report

Source: NCPA

Important explanations for the income gap between the “rich” and the “poor” make the growth in income disparity “practically inevitable,” explain National Center for Policy Analysis Senior Fellow Richard McKenzie and Kathryn Shelton in a new study.

While a number of social and economic factors explain the growth in income disparity -- from family breakdown to government welfare program incentives -- McKenzie and Shelton identify two additional reasons why the “rich” seem to get richer faster than the “poor” by official measures:

  • The way that the income distribution is split into “fifths” of households undercuts the impact of gains made by those at the bottom of the income ladder. 
  • The rich have more opportunities to diversify their investment portfolios and soften the consequences of risk-taking.

The division of households into “fifths” or “quintiles” gives the appearance of greater inequality than actually exists. Rather than being even, there are actually far more people -- and workers -- in the upper income brackets.

  • There are 82 percent more people in the top fifth of households than in the bottom fifth.
  • In 2006, 81 percent of households in the top fifth had two or more workers, but only 13 percent of households in the bottom fifth had two or more workers.
  • In almost 40 percent of households in the bottom fifth, no one was working.

Additionally, this system of “fifths” fails to account for income mobility. When low-income Americans become richer, their gains are not added to the income and wealth of their initial income and wealth stratum, or “fifth,” which leads to a greater appearance of disparity.

McKenzie and Shelton also describe how the wealthy are able to maintain highly diversified investment portfolios. Their wealth allows them to take on risky investments that carry high rates of return without the hazards associated with the far less diverse portfolios of lower income individuals. 

Why the 'Rich' Can Get Richer Faster than the 'Poor': http://www.ncpa.org/pub/st358 

Coming Soon:

  • The NCPA is preparing to release a major health care study by NCPA Senior Fellow and former Medicare Trustee Thomas Saving and will hold a Capitol Hill briefing on July 23rd to report the projections of accelerated health care spending over the coming decade.
  • Ron Paul will speak October 31 in Dallas as part of the NCPA’s Hatton W. Sumners Distinguished Lecture Series.

The seventh annual Four Star Leadership program will take place in Edmond, Oklahoma on July 13-19. The NCPA co-sponsors the summer leadership institute for exceptional high school students, along with the General Tommy Franks Leadership Museum, The Oklahoma Council on Public Affairs, and Oklahoma Christian University.