What Is the Best Way to Measure Inequality?

May 2, 2014

In-kind benefits should be included when measuring inequality, argue economist Sita Nataraj Slavov and Benjamin Ho of the American Enterprise Institute.

Income inequality has been the topic du jour, and recent studies have purported to show increased income inequality and income stagnation for the average household. Are these studies accurate?

  • Traditionally, inequality has been calculated by comparing Americans' annual cash income.
  • Annual cash income has, in fact, stagnated, while inequality has risen.
  • However, this is not the most accurate way to measure income disparities.

Instead, income should include the value of in-kind benefits, and it should be measured over the course of a lifetime, not just one year.

  • By adding in in-kind benefits (such as health insurance and health care), incomes in the lower and middle quintiles have actually grown, and the growth of inequality is reduced.
  • Furthermore, measuring income inequality over a lifetime rather than over the course of a year allows analysts to take into account a person's income fluctuations -- a low-income student, for example, may become a highly-paid executive years later.
  • Annual income inequality measurements, the authors explain, tend to exaggerate inequality.

This new measurement would be an improvement, but it is still not the most comprehensive way to depict disparities. Opportunity is a broader measurement and would be a better indicator of well-being.

Source: Sita Nataraj Slavov and Benjamin Ho, "Measuring Inequality: One Size Does Not Fit All," American Enterprise Institute, April 28, 2014.

 

Browse more articles on Economic Issues