NCPA - National Center for Policy Analysis

Income Inequality in the United States

July 20, 2012

Income inequality appears to be growing in the United States. A Congressional Budget Office (CBO) report released October 2011, which analyzed incomes among the five quintiles between 1979 and 2007, found that over the course of the past few decades, those within the highest quintiles have seen incomes grow much faster than their low-quintile colleagues, says Merrill Matthews, a resident scholar with the Institute for Policy Innovation.

  • According to the CBO, the total share of income for families in the highest quintile rose from 43 percent to 53 percent between 1979 and 2007.
  • Moreover, the top 1 percent's share doubled from 8 percent to 17 percent.
  • By contrast, the other four quintiles' income share was lower in 2007 than in 1979, with the lowest quintile shrinking from 7 percent to 5 percent of total income.

However, the CBO's report, while advertised as comprehensive in its consideration, failed to consider a number of mitigating factors that help explain these trends. Incorporation of these factors allows for a clearer understanding of income inequality in the United States.

  • There are fewer people per household in the United States now than there were in 1979 (the average figure fell from 3.33 to 2.59).
  • This is partially a function of a higher rate of divorce, along with more seniors living on their own.
  • This spreads out household income and causes it to appear lower in aggregated data.
  • Furthermore, the CBO's income data fails to consider the role of benefits in total compensation.
  • An Employee Benefit Research Institute study points out that in 1950, wages made up 95 percent of total compensation, while benefits comprised only 5 percent.
  • By 2004, wages were only 81 percent, versus 19 percent for benefits.
  • Mark J. Warshawsky, director of retirement research at Towers Watson and a member of the Social Security Advisory Board, concludes that while income may have become more unequal, total compensation growth was essentially evenly distributed across all earnings levels.

Source: Merrill Matthews, "How ObamaCare Increases Income Inequality," Forbes, June 22, 2012.

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