How Unequal Are We Compared to Other Nations?

Tim Worstall has an interesting piece about income inequality in Fortune, The Amazing Thing About American Inequality: How Equal The Country Is. Here are some of his observations. Remember that for the GINI index, 0 = perfect equality, and 1 (sometimes 100) equals perfect inequality:

Census has just released the figures on income inequality in the United States. Fascinating reading it makes too. Well, OK, fascinating for the data geeks like myself perhaps. For there’s an interesting little misunderstanding about these figures. There’s an awful lot of people using them to tell us how amazingly unequal the United States is. When in fact the figures show that the country is nothing out of the ordinary for an advanced industrialised nation.

The problem is that people are looking at the US figures as released and comparing them to those of other countries. Something that you really cannot do given the way that the various sets of figures are collected. Here’s an example at the New York Times:

The Gini index value for the United States in 2011 was 0.475, higher than it was in 2010 at 0.469. The index rose in 20 states last year (including New York); there was no statistically significant change in the rest of the states and the District of Columbia (which, at 0.534, has a higher index value than any state).

The Gini index value for New York State was 0.503, which means the state’s household incomes are about as equally distributed as those in Costa Rica, at least according to the most recent international data available.

The figures they use for a comparison are here. Looking at those you might think, well, if the US is at 0.475, Sweden is at 0.23 (yes, the number of 23.0 for Sweden is the same as 0.23 in this sense) then given that a lower number indicates less inequality then Sweden is a less unequal place than the US. You would of course be correct in your assumption: but not because of these numbers.

For the US number is before taxes and before benefits. The Swedish number is after all taxes and all benefits. So, the US number is what we call “market income”, or before all the things we do to shift money around from rich to poor and the Swedish number (in, fact, the numbers for all other countries) are after all the things we do to reduce inequality.

You can see this here at Wikipedia. …

Later …

There are two more points we might make about all of this. From the NYT again:

Of all American states, New York again has the most unequal income distribution, according to a new report from the Census Bureau. Wyoming has the most equitably distributed income.

Well, yes, that’s something that we would pretty much expect actually. The larger your data set the more variance you expect to have in your data set. We would rather expect to have greater income inequality between the 20 million odd in NY State than we would in the 500,000 in Wyoming. …

… Which brings us to the 300 million people in the US. Is it really fair to be comparing income inequality among 300 million people with inequality among the 9 million of Sweden? …

And …

… Which brings us to the second point. Even here the US number is (marginally) over-stated. For even in the post-tax and post-benefit numbers the US is still an outlier in the statistical methods used. In looking at inequality, poverty, in the US we include the cash that poor people are given to alleviate their poverty. But we do not include the things that people are given in kind: the Medicaid, SNAP, Section 8 and so on. It’s possible (I’m not sure I’m afraid) that we don’t include the EITC either.

This article got me curious so I went to the Wikipedia data and created the following table for select OECD countries:

The table confirms Worstalls points. "Market income" inequality in the United States is fourth highest on the list but not radically differenet from other nations. But the really inetersting insight for me is that inequality has risen for sixteen of the seventeen nations over the last quarter century, with the United States being right at the average rate of change. That says to me that something is going on beyond factors that are particular to the United States.

One thing nearly all these nations have in common is aging populations. In agregate, people make more as they get older and that could be skewing income numbers. I doubt that explains it all. The data makes me wonder if there is something systemic about the nature of post-industrial societies that leads to more income inequality.

The income ineqaulity after taxes and transfers for the United States has grown a little faster over the last quarter century, putting us in first place. Worstall raises an important issue about the Earned Income Tax Credit. EITC has grown in significance in recent years as policy tool. It isn't clear that it is included in the U. S. GINI. If not, I suspect adding it in with in-kind transfers would put the U. S. at least as low as the U. K. or Canada. I've also read other sources that emphasize that nation to nation GINI comparisons aren't strictly accurate because of different standards for what consitutes income and transfers. Still, I think a general statement can be made that inequality after taxes and transfers has been growing across the board as well.

Growing inequality is an interesting development that continues to be quite a conundrum, despite the various populist interpretations that float about.