Mark Perry on Income Inequality

Carpe Diem: Income Mobility Is Substantial. We Move Up and Down the Income Quintiles.

In the study "Economic Inequality: Facts, Theory and Significance" by David Henderson (Associate Professor of Economics Naval Postgraduate School) he makes 5 main points about income inequality:

• Although income inequality has increased, it has not increased as much as some economists claim.
• Even though inequality has increased, almost all Americans have become better off economically.
• Household income varies substantially for three reasons that are often ignored: (i) differences in household size and especially in numbers of workers, (ii) differences in skill levels among people, and (iii), related to both of the above, differences in age.
• Income mobility substantially mitigates inequality, and income mobility in the U.S. economy is quite high.
• The majority of economists judge how just an income distribution is only by how equal it is; they don’t ask how people obtained what they have. This disregards the fact that, by and large, those with higher incomes have earned them.

MP: As the chart above clearly shows, the differences in income between households in the top income quintile (top 20%) and those in the bottom income quintile (lowest 20%) are explained by the facts that:

• Households in the top income quintile have:
• Almost 3X as many earners (2.12 vs. 76) as the bottom quintile,
• More than twice as many heads of households working full-time (76% vs. 32%),
• 1.5 times as many heads of households age 35-54 years (peak earning years), and
• Fewer households headed by those in the non-peak age groups (for income) of 15-24 years old, and 75 years and older. Low income households are 9X as likely to be headed by a 15-24 year old, and 5X as likely to be headed by someone older than 75 years.

Further…