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Income inequality in the United States

What is income inequality? And what is the issue of income inequality in the United States?

  • Income inequality refers to the difference in how income is distributed among individuals in society. Income is defined as household disposable income in a particular year. It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. The income of the household is attributed to each of its members, with an adjustment to reflect differences in needs for households of different sizes.
  • Income inequality among individuals may be measured by different indicators. One of the most used indicators of inequality is the Gini coefficient, which is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality.
  • Income inequality in the United States is high and has been rising further in recent years. In 2013, the average income of the top 10% was 19 times higher than that of the bottom 10%, up from a ratio of 11 to 1 in the mid-1980s and 12.5 to 1 in the mid-1990s. This compares to an OECD average of 9.6 to 1 in 2013.
  • The OECD defines the poverty line as half the median household income of the total population. A household is considered poor by the OECD if its disposable income is below the poverty line. For a household of four people the poverty line in the US stands approximately at 32000 $ a year. Income poverty affects around 18% of the population in the United States, a rate considerably higher than the OECD average of 11%.
  • Between 2008 and 2013, real average household disposable income in the United States increased by 2.5%. Household income at the bottom 10% fell by 3.2%, while at the top 10% it increased 10.6%.
  • In the last three decades, low-income households have not benefited at all from income growth. After accounting for inflation, the average income of the bottom 10% in 2012 was 3.3% lower than in 1985, despite overall household income increasing by 24%.
  • While the US average household income (corrected by purchasing power differences) is about 14% higher than in Canada and about 25% higher than in Germany and France, the average income of the bottom 10% in the US is 42% lower than in Canada and about 50% lower than in France and Germany.

Why is income inequality important for the United States?

Redistribution through income taxes and cash transfers is considerably lower in the United States than in most other OECD countries. They reduce income inequality among the working-age population by 20%, the OECD average is 26% and around 30% in France and Germany.

Differently from most OECD countries, the US tax-benefit system does not create large work disincentives for people to move from inactivity to part-time work. This is partly due to in-work benefits such as the EITC, which incentivises people to take up low-paid jobs.

On the other hand, the tax-benefit system creates disincentives for workers to move from part-time to fulltime jobs, more than in the OECD average. This is also partly due to EITC, which is withdrawn as earnings increase.

Tax-benefit measures implemented in the United States between 2007 and 2010 included a number of fiscal stimulus measures. Some measures were rolled back later as the economy started to recover. Fiscal stimulus measures included permanent and temporary increases in tax reliefs and tax credits; extending the duration of unemployment benefits; replacing the "Food Stamp Program" with "Supplemental Nutrition Assistance Program"; and reducing payroll tax rates in 2011 and 2012.

Overall, tax-benefit measures implemented between 2007 and 2013 helped families to cope with effects of the crisis, mainly due to higher social benefits. The impact was particularly positive for families that were out-of-work and earning below the average wage, mainly due to changes in unemployment, social assistance benefits and tax credits. Families with middle to high earnings gained from cuts on taxes and, especially, social contributions, but these measures were rolled back in 2013.

In the US, a large share of households has high levels of debt. Three in four households are in debt and one in four is over-indebted (debt-to-asset ratio above 75%). This exposes them to sizeable risks in the event of sudden changes in asset prices, with implications for the vulnerability of the economic system as a whole.

While in most countries the fall in employment drove the rise in labour income inequality between 2007 and 2011, in the United States both lower employment and a widening wage gap contributed to earnings inequality during the crisis years.

Higher female employment and work intensity as well as a lower gender wage gap had a strong equalising effect in the US. Had female work conditions remained the same as 20 years ago, household income inequality would have been almost 3 Gini points higher than today.

Methodology and conceptual issues

There are a number of conceptual issues to take into account when trying to define how rich or poor someone is relative to the rest of the population. To help you better understand our methodology, here are some of the questions we considered when building Compare your income

Where do the data come from?

Most of the data on the actual distribution of income are drawn from the OECD Income Distribution Database. This database is based on national sources (household surveys and administrative records) and on common definitions, classifications and data-treatments. The method of data collection used for the OECD Income Distribution Database aims to maximise international comparability as well as inter-temporal consistency of data. This is achieved by a common set of protocols and statistical conventions (e.g. on income concepts and components) to derive comparable estimates. Due to the increasing importance of income inequality and poverty issues in policy discussion, the database is now annually updated. The OECD is currently working on extending its database to a number of other key partner countries.

How is income defined and why do we consider net income?

The definition of income used here refers mainly to cash income - excluding components such as imputed rents - regularly received over the year. Net income is defined as total market income (i.e. gross earnings, self-employment income, capital income), plus the current transfers received, less the taxes and social security contributions paid. This is the income that people have available to buy goods and services, so it is a better measure of material living standards than pre-tax income or some measure of earnings alone.

Why is income measured at the level of the household?

The welfare of an individual in a household will depend not only upon their own income, but also on that of other household members. By measuring income at the household level, we are implicitly assuming that all individuals within the household are equally well off and therefore occupy the same position in the income distribution. In practice that might not be true, but it is the least arbitrary assumption that we can make based on the available data.

The OECD Income Distribution Database provides information on the equivalised disposable (i.e. net) income. 'Equivalising' means adjusting a household's income for its size, so that we can look at the income of all households on a comparable basis. The needs of a household grow with each additional member but - due to economies of scale in consumption- not in a proportional way. Needs for housing space, electricity, etc. will not be four times as high for a household with four members than for a single person. With the help of equivalence scales each household is assigned a value in proportion to its needs. The equivalence scale used in the OECD Income Distribution Database divides household income by the square root of the household size. This implies that, for instance, a household of four persons has needs twice as large as one composed of a single person.

To bring back data at the household level, we then multiply income statistics available in the OECD Income Distribution Database by the square root of the household size. For instance, in the case of a household consisting of a couple with two children, we multiply the income data from the OECD Income Distribution Database by two (i.e. square root of four).

How is the poverty line computed?

We compute the income needed to be considered non-poor as half the median income of households of the same size of the respondent's. The median income is the income that divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount.

Data on median income come from the OECD Income Distribution Database

How are 'income diagrams' computed?

In order to further compare the perceived inequality in a society with the actual distribution of income, we divide the population into seven income classes. The 'lower-income' class (lowest bar) covers all individuals with a net income below 50% of median income of the total population. Therefore, the demarcation of the lowest group is equal to the definition of poverty used in this tool. The 'average-income' class covers all individuals with a net income between 50 and 150% of the median income and spans three bars: from 50 to 80% of the median income; from 80 to 110% of the median income; and from 110 to 150% of median income. Similarly, the 'higher-income' class identify all individuals with a net income above 150% of the median income and covers the three highest bars of the diagrams: from 150 to 200% of the median income; from 200 to 250% of the median income and above 250% of the median income.

Obviously, the demarcation of classes remains somewhat arbitrary. However, the demarcation of single groups is not the focus of our analysis. The intention of the definition of these income classes is basically the graphical illustration of the density function of incomes.

Drawing such income diagrams requires information on income at the percentile level, which is currently not available in the OECD Income Distribution Database. For most OECD countries, information on income percentiles have been provided to the OECD by national data providers, and is based on those national sources that are deemed to be most representative for each country. Such information is currently not available for four OECD countries: Chile, Japan, Korea and Turkey.

To which year do data refer?

The information available in the OECD Income Distribution Database is more up-to-date when compared to information available through many other statistical sources, but still reflects the long time-lags that characterise data collection in this field in most OECD countries. For most countries data on income and poverty shown in this tool refer to 2013 or 2012. To bring the figures up to date, we have adjusted them in line with changes in the consumer price index for all goods up to 2014.