Explaining Income Inequality

Click to enlarge.

There's a lot of discussion on the topic "income inequality," especially concerns about "increasing income inequality" (223,000 Google hits) and "rising income inequality" (432,000 Google hits).  There's apparently not as much discussion on "explaining income inequality" (18,800 Google hits), a topic this post addresses. 

The chart above (click to enlarge) shows selected characteristics of U.S. households by income quintiles (and the top 5%) for 2009, using data from the Census Bureau (here and here). Here is a summary of some of the differences between low-income and high-income households in America:

1. On average, there are more income earners per household in highest-income households (2.05 earners for the top fifth) than earners in the lowest-income households (0.48 for the lowest fifth).

2. Married-couple families represent a much greater share of the top income quintile households (79%) than lowest quintile households (18%).

3. More than 3 out of 4 households in the top fifth of households are in their prime earning years between 35-64 years old, compared to only 43% of households in the bottom fifth. The lowest quintile households are more than 1.5 times as likely to be younger (under 35 years) as the highest quintile households (23.4% to 14.8%), and more than three times as likely to be old (65 years and over) as the top fifth (33.3% vs. 9.9%).

4. Almost 4 times as many top quintile households are working full-time (78%) compared to the bottom quintile (20.8%), and more than five times as many households in the bottom quintile are not working (65%) as households in the top quintile (12.2%).

5. Households in the top quintile are almost seven times more likely to have a college degree than bottom quintile households (72.8% vs. 10.8%). 

Bottom Line: The highest-income quintile has four times more people working per household than the lowest quintile (2.08 earners vs. 0.48), and individuals in those households are far more likely to be well-educated, married and working full-time in their prime earning years.  In contrast, those individuals with low incomes are far more likely to be less-educated and working part-time, and either very young or very old living in single-parent households.  Given these significant differences in household characteristics, it's not too surprising that there are huge differences in incomes among American households.  It's also very likely that those individuals in the highest quintile were once in the lower quintiles before they acquired job experience and education, and they'll likely be in a lower quintile again when they retire.  

Understanding the factors explaining income inequality would also help explain why income inequality changes over time.  For example, compared to previous years, in 2009 there were both: a) more single-parent households, and b) more married, dual-earner households, following trends going back to the 1960s, and both of those trends would explain rising income inequality over time.

Thanks to Diana Furchtgott-Roth for the idea.