Income Distribution and Inequality in the US

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

While the United States is the richest country in the world when measured by GDP, it drops to #7 when measured by income per capita. In this lesson, we'll learn about the distribution of income in the United States, and how it has changed over time.

Defining Income Distribution and Income Inequality

When economists talk about income distribution, they are referring to how a country's gross domestic product or GDP is distributed among its citizens. The GDP is a measurement of how much money the goods and services a country produces in a year. Typically, income distribution is discussed in terms of an average income per person or per household per year. Studying income distribution may lead to discussions about income inequality.

The degree of a country's income inequality is measured by determining how a country's income is allocated. For example, a country where 80% of the population made the average income plus or minus 10% per year would have low income inequality, while a country where only 20% of the population made close to the average, 75% made far below the average, and 5% made high above the average each year would have high income inequality. Income inequality may be measured in many ways.

Measuring Income Distribution and Income Inequality

Income distribution can be measured by the median income, which in the United States in 2014 was $53,657. That isn't the average, or mean, income; the median income is the number where exactly half of the households in the United States make more than $53,657 and half make less than that amount.

That doesn't sound like a bad number; it certainly sounds like a livable wage. But remember, that is a consolidated number. Think about the median in a simple context -- the median of 49 and 51 is 50, but so is the median of 1 and 99. But while those sets of numbers share the same median when you are discussing income, they tell very different stories. If the incomes are close together, then income equality exists. However, income inequality occurs when income levels become significantly lopsided, like the example of 1 and 99, where a few people have a lot of income while many people make very little income.

Too much inequality may eventually cause the scale to tip over.
Rich v. Poor

Consider the statistics about how wealth is distributed across the United States but before you read them, remember that they are based on wealth, not income. Wealth includes income, but it also includes the value of assets such as investments, homes, etc.

  • The richest 20% of families in America own 84% of the wealth in America
  • The poorest 40% of families in America own .3% of the wealth in America
  • The family of the man who founded Wal-Mart, the Waltons, have as much wealth as the poorest 42% of American families combined.
  • In 39 states, the richest 1% of households make between half and all of the income in that state.

Income Inequality Over Time

The degree of income inequality in the United States hasn't always been as significant as it is today. In fact, just fifty years ago the average CEO made 50x more than the average employee; today, the average CEO makes about 350x more than the average employee. Since 1980, the average income for a household in the top 1% of earners has doubled, but over the same time period, the increase in income for a household in the bottom 20% of earners has only increased 19%.

Measuring Income Inequality

One way that economists depict the distribution of income or wealth, which includes assets like property, is known as the Lorenz curve. While a Lorenz curve is complex to calculate, interpreting one is fairly simple.

Lorenz Curve for United States
Lorenz Curve

On the Lorenz curve in the graph seen above, the 45-degree black line indicates exact wealth equality; in other words, everyone has the same amount of assets. If one person owned everything, it would show a straight, vertical line running against the right axis. The curve shows the actual distribution. Often, the most useful purpose of the Lorenz curve is to determine whether it is changing over time. As the curve 'deepens' as it does in this graph, it shows that the richest citizens are owning more of a country's wealth.

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