Income inequality can be explained by household demographics

Great post by Mark Perry at AEI.

"The Occupy Wall Street (OWS) protest has returned national attention to the topic of income inequality; see recent commentary from bloggers Megan McArdle here and James Pethokoukis here and here. Both highlight empirical evidence that challenges the narrative that income inequality has gotten worse over time.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart below.

Here is a summary of some of the key demographic differences between American households in the bottom and top income quintiles in 2010:

1. On average, there were significantly more income earners per household in the top income quintile households (1.97) than earners per household in the lowest-income households (0.43).

2. Married-couple households represented a much greater share of the top income quintile (78.4 percent) than for the bottom income quintile (17 percent), and single-parent or single households represented a much greater share of the bottom quintile (83 percent) than for the top quintile (21.6 percent).

3. Roughly 3 out of 4 households in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to only 43.6 percent of household members in the bottom fifth who were in that age group.

4. Compared to members of the top income quintile, household members in the bottom income quintile were 1.6 times more likely to be in the youngest age group (under 35 years), and three times more likely to be in the oldest age group (65 years and over).

5. More than four times as many top quintile households included at least one adult who was working full-time in 2010 (77.2 percent) compared to the bottom income quintile (only 17.4 percent), and more than seven times as many households in the bottom quintile included adults who did not work at all (65 percent) compared to top quintile households whose family members did not work (13.3 percent).

6. Family members of households in the top income quintile were about five times more likely to have a college degree (60.3 percent) than members of households in the bottom income quintile (only 12.1 percent). In contrast, family members of the lowest income quintile were 12 times more likely than those in the top income quintile to have less than a high school degree in 2010 (26.7 percent vs. 2.2 percent).

Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.

The American economy and labor market are extremely dynamic, and evidence shows that individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes. It’s very likely that many high-income individuals who were in their peak earning years in 2010 were in a lower income quintile in prior years, before they acquired education and job experience, and they’ll move again to a lower quintile in the future when they retire.

Last November, presaging today’s protests on Wall Street, columnist Nicholas Kristof wrote in the New York Times (“A Hedge Fund Republic?”) that if Americans want to observe “rapacious income inequality,” they don’t need to travel to a banana republic. Rather, he suggests that “you can just look around” the United States to see “stunning inequality.” Given the significant differences in household characteristics by income group, it shouldn’t be too stunning that there are huge differences in incomes among American households, and it has nothing to do with “rapaciousness.” Rather, it can be easily explained by household demographics."