Economic Inequality: Facts, Theory and Significance

Policy Reports | Economy | Government | Social

No. 312
Tuesday, June 10, 2008
by David R. Henderson

The Basic Facts about Income Inequality

Income inequality of families in the United States has increased substantially since about 1970.  [See Appendix Table for detailed numbers.]  For instance:

  • In 1970, families in the lowest income quintile (fifth) received 5.4 percent of all the money income — falling to 5.3 percent in 1980, 4.6 percent in 1990, 4.3 percent in 2000 and 4.0 percent in 2005.
  • The share of income going to the top quintile of families, by contrast, rose from 40.9 percent in 1970 to 41.1 percent in 1980, 44.3 percent in 1990, 47.4 percent in 2000 and 48.1 percent in 2005.3

These data clearly indicate increasing inequality, but they do not give the reasons for the increase.  Nor do they show that “the rich got richer and the poor got poorer.”  This conclusion doesn’t follow for three reasons.

“Inequality has increased, but all income groups are better off.”

First, the terms “rich” and “poor” relate to wealth, not income.  A family can have a low income and high wealth, as do many families headed by a retiree.  Indeed, the second-wealthiest group of families consists of those headed by someone who is 65 or older.4 On the other end, a family can have high income and little wealth, as do many families with a household head who is young and highly paid.

Second, if the shrinking percentage of total income of the lowest quintile were part of a growing income pie — which the Census data confirm it is — low-income earners could still be better off than they were previously with a slightly larger piece of a smaller income pie.

Third, the data are a series of snapshots of people in the various quintiles.  There is substantial mobility among quintiles.  This means that poor people, even measured by income and not wealth, could be better off because they moved to a higher quintile.

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