NCPA - National Center for Policy Analysis

Factors Behind Income Inequality

July 29, 1999

According to Census Bureau figures, income inequality is growing. One measure of income distribution, the Gini index -- in which a figure of 0.0 means every family or household has the same income, and 1.0 means just one household or family earns all the income -- rose from 0.365 in 1979 to 0.425 in 1996, indicating a 16 percent increase in income inequality.

But there are a number of factors that explain why it appears the rich are getting richer and the poor getting poorer in America, say observers.

  • To begin with, the Census Bureau changed the questions it asked to determine who was in upper-income households beginning in 1994; for instance, instead of asking in surveys whether respondents earned $300,000 a year or more, they began asking whether they earned $1 million or more -- thus uncovering a greater number of million dollar earners than before.
  • Also, census figures overstate price inflation, which makes it appear that those on the bottom economic rung are having their wages eaten away by increasing prices more than they really are.
  • Furthermore, industries are paying premium salaries to hire workers with greater skills -- and the growing disparity in pay between skilled and unskilled workers accounts for 33 percent to 43 percent of inequality, according to a Brookings Institution study.
  • Men with above-average incomes are more apt to marry women with above-average incomes than was true in the past -- driving up the household incomes of well-to-do families and accounting for 13 percent of the rise in inequality, says Brookings' chief economist, Gary Burtless.

Finally, there is the rising share of families headed by one person. Such families show a greater range of inequality than families head by a married couple. This trend toward single- parent families accounts for 21 percent to 25 percent of the increased inequality, Burtless estimates.

Source: Gary Burtless, ""Effects of Growing Wage Disparities and Changing Family Composition on the U.S. Income Distribution," CSED Working Paper No. 4, July 1999, Brookings Institution, 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036, (202) 797- 6000; Macroscope, "Less than Equal?" Investor's Business Daily, July 29, 1999.


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