The Distribution of Income: Income Inequality in The United States

Income Inequality in The United States On average, the standard of living of American citizens has improved vastly since the 1950s. The median income of families increased from $4,599 per year in 1955 to $32,191 in 1988. A family is defined for statistical purposes as a group of two or more persons related by birth, marriage, or adoption and residing together in a household. Adjusting for the effects of inflation, this represents an increase of more than 30 percent in living standards. On average, the income earned by a family in the United States in 1988 bought about one third more goods and services than it did in 1955! A median family income of $32,191 means half of the families in the country earned less than that sum and half earned more. Data on the distribution of total income earned indicate the variation in standards of living within the nation. From these data we can learn the percentage of U.S. citizens earning very low incomes and the percentage earning very high incomes. Once we have such information we can make judgments about policies designed to alter the distribution of income. This helps us evaluate the equity or fairness of an economic system with respect to the distribution of well-being. Income Shares How unequal is the distribution of money income in the United States? The facts show that there's considerable inequality. One way we can see this is to divide all families into groups ranked according to actual income earned. We can then compare the percentages of total money income of these groups. The first group will be the one fifth of families with the lowest incomes in the nation. The second group will be the one fifth of families with the second lowest incomes. In this way we can divide the population into five groups, with the fifth group including only those families with the highest annual money incomes. The table in Box 1 shows each group of households' share of total money income for selected years from 1947 to 1987. Money income includes all labor earnings, nonlabor earnings, and cash payments, including welfare assistance to the poor and social security pensions. If income were equally distributed, each one fifth of the population would account for exactly one fifth, or 20 percent, of total national income. Instead the lowest one fifth of families-the poorest fifth-accounted for less than 5 percent of money income in 1987. The highest or richest fifth of families accounted for more than 43 percent of money income! In other words, the richest 20 percent of the families in the United States have annual incomes that exceed those of the poorest 20 percent by almost nine times! Similarly, the fifth of the population with the second lowest income enjoys total annual income twice that of the poorest fifth. There's even a wide gap between the poor and the near poor! The third or middle-income fifth enjoys an annual income more than three times that of the poorest fifth. Finally, the fourth fifth, representing the upper-middle income group, enjoys five times the annual income of the poorest fifth. Also note that the highest fifth enjoys about as much income as the middle- and upper-middle income groups combined. One other interesting fact stands out from the data. The distribution of money income shares among the five segments of the population has been remarkably stable from 1947 to 1987. This observation needs to be qualified in two ways. First, the data don't include the value of government assistance to the lowest-income groups in the form of food and medical care. Second, the data don't include the influence of taxes on disposable income. Soon we'll discuss these two factors and estimate their effects.