Income Inequality
How much income inequality is appropriate? This is a hotly debated topic among economists and politicians. Nearly everyone in industrialized countries agrees that some degree of income inequality is welcome. The debate is about how much inequality is fair. The current degree of inequality in the United States is shown in the table below.
Income inequality has widened in most industrialized countries. For example, in the United States, in 1979 the top 20% earned 44% of the total income. In 2022, the highest income earners (top quintile) earned 52.1% of the country’s total earnings. Note that these percentages don’t take into account welfare transfer payments and tax payments. If transfer payments and taxes were included, the gap between the highest and lowest quintiles wouldn’t be a wide.
Based on the table, the highest income earners are earning more as a percentage of total earnings in the country compared to decades ago. The lowest quintile of income earners’ share has decreased since several decades ago. Is this a bad thing? Not necessarily. While the relative share of the lower income groups has declined, the absolute amount (absolute standard of living, or purchasing power) of all income groups has increased. It is true that the highest income groups gain the most, but looking at any average 10 year period of time, even the real (inflation adjusted) income of the poorest 20% rises by more than 6%. The total income pie (see pie chart below) gets bigger because of economic growth.
Percentage Distribution of Households, by Income Group
| Income Amount in Current Dollars (for 2022 data), appr. 27 million households in each quintile | Percent of All Income Received (2022)* | Percent of All Income Received (2017)* | Percent of All Income Received (2013)* | Percent of All Income Received (2011)* | Percent of All Income Received (2009)* | Percent of All Income Received (2007)* | Percent of All Income Received (2005)* | Percent of All Income Received (1979)* |
| Lowest quintile; under appr. $29,000 | 3.0 | 3.0 | 3.2 | 3.2 | 3.4 | 3.4 | 3.4 | 4.2 |
| Second quintile; upper limit is appr, $58,000 | 8.2 | 8.1 | 8.4 | 8.4 | 8.6 | 8.7 | 8.6 | 10.3 |
| Third quintile; upper limit is appr. $93,000 | 14 | 14.0 | 14.2 | 14.3 | 14.6 | 14.8 | 14.6 | 16.9 |
| Fourth quintile; upper limit is appr. $141,000 | 22.5 | 22.6 | 22.9 | 23.0 | 23.2 | 23.4 | 23.0 | 24.7 |
| Top quintile; over appr. $156,000 | 52.1 | 52.3 | 51.1 | 51.1 | 50.3 | 49.7 | 50.4 | 44 |
| Top 5% of all income earners; over appr. $300,000 | 23.5 | 23.2 | 22.2 | 22.3 | 21.7 | 21.2 | 22.2 | 16.4 |
*Quintile percentages may not add to 100% due to rounding.
Source: United States Census Bureau (www.census.gov and https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html)
For the latest statistics on income distribution in the United States, please click here.
Are the Rich Getting Richer and the Poor Getting Poorer?
Even though the income inequality between the top and the bottom earners in the United States has been widening since 1979, the overall standard of living (even after adjusting for inflation) for the large majority of people during most (with the exception of recessionary) years in this country is rising. In great part, this is because of income inequality. A free market economy provides the greatest opportunities for advancements, and also leads to income inequalities. A free market economy encourages hard work, innovation and increased productivity, and an increased standard of living for many. Some people might feel worse off in comparison, but in an absolute sense, most people can afford to buy more and enjoy more purchasing power and higher quality products in comparison to years ago.
Economists who claim that the poor are getting poorer and the rich are getting richer are only partly correct. They are correct about the rich getting richer, both in absolute and relative terms. But the poor are getting poorer only in relative terms, not in absolute terms. Thus, they are incorrect about the poor getting poorer, if they are referring to the absolute standard of living and purchasing power (the size of the slice) of the poor.
The pie charts below illustrate this trend. Let’s study the income shares of the poorest quintile in year A (for example, 40 years ago) and year Z (today). Let’s say that in year A, the poorest quintile earned 4 % of all income. Let’s say that in year Z, the poorest quintile earned approximately 3 % of all income. The year A share is a bigger percentage of that year’s total pie. However, the year Z share is a bigger absolute slice. Would you prefer 4 % of a small pizza, or 3 % of a large pizza?
Income Mobility
Another consideration of the “Are the poor getting poorer?” debate is whether the poor people in year A are the same poor people in year Z. The Census Bureau has conducted studies of people, and tracked them over ten-year periods of time. It found that during a recent decade, nearly 60% of people who are in the lowest income quintile (20%) moved to a higher quintile within ten years (https://www.stlouisfed.org/publications). Countries with income inequality and free market opportunities tend to be dynamic and mobile, and most people have significant opportunities to improve their economic situation over time. Conversely, high income earners may experience downward mobility; 57% of the richest 1% moved out of this category ten years later (possible explanations include: job demotions or working less; retirement; family break-ups (keep in mind that the statistics measure household incomes).
Should we have more mobility? In other words, should people at the bottom of the income scale when they are born, have more opportunities to climb the social and economic ladder? Most people agree that the answer should be yes. The million dollar question is how to accomplish this.
Education is important. In the United States, it leaves much to be desired, in great part due to its public school near monopoly (not enough school choice). The judicial system also leaves much room for improvement. Are we robbing too many disadvantaged young people from opportunities by arresting them for relatively harmless crimes such as possession of non excessive amounts of drugs?
Are minimum wage laws harmful to minority youth? Inner city teenagers are not getting the proper education in the United States, in great part due to public school monopolies. Then, when looking for a job, they are faced with businesses who are required to pay them a high minimum wage. The high wage means that a larger pool of people will apply for jobs; businesses then will opt to hire people with better education and more experience. This, in great part, explains the very high unemployment rate among minority teenagers in the United States.
Poor education and unemployment robs these young people of opportunities to advance. Some economists have suggested for the United States to allow families to choose the school they want to attend (including providing government vouchers if they choose to attend a private school) and adopt elaborate apprenticeship programs similar to ones that exist in Germany.
Transfer Payments and Taxes
Other factors to consider in the discussion about income inequality are non-cash transfer payments (food stamps, housing subsidies, government medical insurance assistance programs, etc.) to mostly the poorest 20%, and tax payments made by mostly the highest 50% of all income earners. These two components are not included in the income distribution numbers. If non-cash payments were included, the Census Bureau estimates that income of the poorest 20% would increase by roughly 50%. If tax payments were included the income of the wealthiest 20% would decrease by 7% (https://www.stlouisfed.org/publications).
The Lorenz Curve
A diagram illustrating the extent of income inequality in the United States is drawn below. This so-called “Lorenz Curve” indicates that the further the curve bows outward, the greater the country’s income inequality. The Lorenz curve illustrates the extent of a country’s income inequality based on the cumulative earnings of the different quintiles. Using the figures from the table above, the cumulative earnings are as follows:
| Percent of All Families | Cumulative Percent of All Income Received (2022) | Cumulative Percent of All Income Received (2007) |
| Lowest (poorest) 20% | 3.0 | 3.4 |
| Lowest 40% | 11.2 | 12.1 |
| Lowest 60% | 25.2 | 26.9 |
| Lowest 80% | 47.7 | 50.3 |
| All Households (100%) | 100 | 100 |
The United States distribution shows the Lorenz curve traveling through Point A, at which the poorest 20% earn 3.0% of all income. At point B, 60% of the poorest income earners receive 25.2%.
The hypothetical straight line indicates perfect income equality. This means that each quintile earns 20% of the country’s total income.
The Gini Coefficient
The Gini coefficient is a ratio between 0 and 1. It is equal to the area between the straight line and the curve and represents the amount of income inequality in a country or area. If a country has a Gini coefficient of zero, then it has perfect income equality. This is when everyone has the same amount of income. If the coefficient is 1, then there is perfect income inequality. This is when one person has all the income, and the rest of the country has nothing. The closer the Lorenz curve is to perfect equality (the 45 degree line), the closer the Gini coefficient is to zero.
The Gini Index
The Gini index is simply the Gini coefficient expressed as a percentage. For instance, if the Gini coefficient is .3, then the Gini index is 30%. In 2022, according to the United States Census Bureau, the United States Gini coefficient was .49, so the Gini index was 49%. By comparison, Japan, Canada, and most industrialized Northern European nations have Gini indices ranging from 25 – 40% (less income inequality). Various less developed countries have Gini indices ranging from 50 – 70% (significant income inequality).
Video Explanation
For a video explanation of income distribution and income inequality, please watch:
Just FYI: Your links on this page are broken and do not lead to any data or articles.
Thank you! Links often change so it is difficult to always have all them hot. I routinely update this text once a year though, so I will update the bad ones then.
Fun fact: you offer a person 3% of a large pizza or 4% of a medium pizza they will respond, “Why can’t you just cut the pizza into eights like a normal person, John?”
Thanks for your comment, Erin. My response to this is that if you cut everything into equal pieces, the pizza will never grow. Allowing inequality promotes people’s incentives to work hard and innovate. Equal pieces, i.e. communism, has been proven to lead to economic stagnation. So, the question of whether you want 4% of a very small pizza or 3% of a much larger pizza is relevant.
I appreciate this page; it is very well done. However, I don’t know if any definitive statement can be made about communism as a long term project. I believe the trickle down theory or the idea that a rising tide lifts all boats has largely been disproven with the 50 plus years of data we have.
Hi Malik, thank you for your comment. With all due respect, feel free to show us proof that communism has been an economic success. Capitalist markets, however, have provided clear proof over the past centuries that average incomes and average standard of livings consistently increase. An average poor person in a capitalist economy today is far better off than one in a communist economy. It has been said by many people that the trickle down and the rising tide theories don’t work. However, just because many people have said it doesn’t make it true. Capitalism may not be perfect, but it is clear by now that it is far superior economically than communism.
with all due respect feel free to show us an example of pure communism. you’re making strong claims without having actual data to back it up
as you said yourself, “just because many people have said it doesn’t make it true.”