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FRIDAY, APR 12, 2024
We hear a lot about income inequality in the United States, and for good reason: The gap between rich and poor in parts of the country approaches Third World levels. And while it’s recognized that the income gap narrowed slightly during the COVID-19 pandemic because of a massive government spending effort, an increasing gap in the United States between rich and poor has been an economic fact of life since 1980.
Studies have shown that a large gap between rich and poor leads to higher poverty rates, political polarization, more household debt, and a greater risk of financial crises. Its causes have been attributed to lower unionization membership, more monopolies, outrageous executive pay, increased financialization of economies, and technological changes that result in greater unemployment and/or underemployment rates.
Despite the overall growth in the income gap in the United States, it didn’t emerge as a major political issue until the aftermath of the 2007-09 financial crisis. The discussion was boosted by research by Emmanuel Saez and Thomas Piketty, who used detailed tax data from the Internal Revenue Service to show that the top 1 percent of U.S. households accounted for two-thirds of all income gains between 2002 and 2007. The research, combined with the general fury over an economic recovery plan that favored large financial institutions over struggling middle-class Americans, sparked the Occupy Wall Street movement that brought the issue into public consciousness.
Although the furor over the gap has died down considerably, the chasm between rich and poor has reverberated, contributing to seismic social and political events such as the rise of the Tea Party in the early 2010s, the 2016 election of a populist authoritarian as president, and widespread economic dissatisfaction ahead of the 2024 U.S. political elections. But given that not all of us have Ph.Ds. in economics or the time to wade through decades of detailed IRS data, how do we measure the gap?
There are a number of different methods used to measure the gap between rich and poor, but the most popular – and probably the easiest to obtain – is by using the Gini coefficient. Also known as the Gini index, the number is a simple decimal between 0 and 1. A Gini of 0 means all income is distributed evenly; a Gini of 1 means a single household receives all the income in a given geography. It’s important to keep a few things in mind when looking at a Gini figure: The numbers will appear to be very small, since they’re decimals. Most places won’t have a Gini that’s anywhere near 0 or 1, unless they’re extremely small areas, such as a Census block group. And finally, a small numeric increase doesn’t mean inequality isn’t an increasingly bigger problem.
A couple of definitions are important here. First, the Gini doesn’t measure the wealth gap; it only tries to gauge the income gap. Given that the richest 10 percent of U.S. households own about $42 trillion in stock market wealth (and the bottom half owns less than $500 billion), the actual gap between poor and rich households is likely much larger that the Gini would indicate.
The Census Bureau defines income as “income received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, Social Security, union dues, Medicare deductions, etc.” The definition typically rules out non-cash income received by poor households, such as food stamps, housing assistance, and health insurance provided by programs such as Medicaid, which would further widen the gap between rich and poor. The Congressional Budget Office reported a Gini of 0.59 in 2016 but dropped the number to 0.42 after taxes and other benefits were taken into account.
Second, many people assume that households are made up of families. The Census Bureau, however, defines a household as all people who occupy a housing unit. So a household can be a single person, or it can be a dozen people. Married couples account for 47.5 percent of U.S. households; people living alone make up about 28.3 percent of households. The average U.S. household in 2022 includes 2.6 people.
In general, income increases with household size – at least, until the household includes more than four people. The median household income in the U.S. in 2022 was $75,149. The typical single-person household reported $38,445 in income; four person households recorded a median of $113,664.
One major advantage of the Gini is that it can be used across multiple geographies with a relatively high degree of accuracy. Social Explorer, for example, offers the Gini for the nation, states, congressional districts, counties, metropolitan statistical areas (MSAs), zip codes, Census tracts, and Census block groups, among other geographies.
The Global Gini
A number of organizations calculate a Gini coefficient, ranging from the Census Bureau and the Federal Reserve Board to the Organization for Economic Cooperation and Development (OECD) and the Central Intelligence Agency. The numbers vary since different organizations use a different variant of the formula to calculate the coefficient. The difference usually lies in the distribution of income figures used to calculate the Gini.
The Gini isn’t only important for its ability to assess economic fairness. Studies have associated a high figure with a greater level of dissatisfaction among the population, and a greater probability of social and political unrest. For example, countries in southern Africa and South America have many of the highest Gini numbers in the world; the Nordic countries and western Europe nations account for most of the lowest Gini figures. The United States has one of the highest Gini numbers of any industrialized nation. The CIA estimated the U.S. Gini at 41.5 in 2019, meaning it was more equal than the Democratic Republic of Congo (42.1) or the Philippines (42.3) but less equal than Tanzania (40.5) or Bulgaria (40.3).
Generally speaking, the U.S. Census Bureau will have the most accurate, publicly available domestic figures for a Gini coefficient since it has access to individual income estimates via its annual American Community Survey; other organizations trying to calculate a Gini typically don’t have that level of access and will use broader income ranges. Trends, however, will usually remain the same, regardless of the source.
The index is named for Corrado Gini, an Italian statistician (and fascist who once advocated the annexation of Italy by the U.S.) who introduced the concept in a 1912 paper. Not to get too deep into the mathematical weeds, but the Gini is described as the area between perfect equality on a graph and the Lorenz curve, which represents the actual distribution of income in an area.
The formula can appear quite intimidating to the non-mathematical among us:
(It’s not as bad as it looks. And to help matters, there are quite a few websites that offer tutorials and formulas for people who want to calculate their own Gini, using their own income distributions, i.e., the percentage of people in any given area who make between $1 and $10,000, and the percentage of an area’s total income that they earn.)
The Gini formula is frequently criticized for providing only a two-dimensional view of income inequality, but given accurate data – and an understanding of how to apply the formula – it also can be used to study income gaps within different groups, such as age cohorts and racial/ethnic populations.
So how does the U.S. stack up against other countries? The CIA has South Africa as the country with the greatest gap between rich and poor, with a Gini of 0.63; the smallest gap is in Slovakia, with a Gini of 0.232. The United States has the 46th highest Gini of 0.415. OECD numbers are roughly comparable. The organization lists Costa Rica as the most unequal of its 38 members, with a Gini of 0.472 and Slovakia with a Gini of 0.217. The U.S. has the fifth-highest Gini at 0.395.
The Federal Reserve doesn’t track countries outside the U.S. but maintains a database of Gini coefficients from 1963 to the present. Its 2021 Gini was calculated to be 0.398, an improvement from the 2019 Gini of 0.415, but still a steep increase from the 0.347 figure calculated in 1980.
The U.S. and Income Inequality
The Census Bureau provides its own figures; in its 2018-22 American Community Survey release, it calculated a nationwide Gini of 0.480. Using Social Explorer’s customizable mapping tools, you can visualize the Gini for 16 different geographies, ranging from states and counties to zip codes and even block groups.
And, in case you were curious, you can use Social Explorer’s cutting-edge reporting functions to find that the most unequal distribution of incomes in U.S. states can be found in the District of Columbia (0.544), New York (0.515), and Connecticut (0.499). On a much smaller geographic level, the biggest income gap reported by the Census Bureau was found in a zip code in Tuthill, S.D. The zip code, which lies within the Pine Ridge Reservation, had a Gini of 0.91, far more than a Niagara Falls, N.Y., zip code that reported a 0.83 Gini. The most equal distribution of income was found in a Pulaski, Ga., zip code that reported a Gini of 0.0002.
Although the Gini has increased 7.6 percent since 1993 – the earliest year for which comparable data have been available – the Census Bureau reported last year that the Gini fell by 1.2 percent in 2022, the first decrease since 2007. The decline was attributed to a slight decline in median incomes among middle- and high-income households. The Census Bureau, however, found that the Gini actually increased 3.2 percent when after-tax income was considered, likely the result of 2017 tax changes by the Trump administration that largely favored corporations and wealthy households while punishing lower- and middle-income taxpayers.