Wall Street Cheat Sheet
By: Dan Ritter
November 20, 2013
"Income inequality" is a loaded phrase. Really, it is a subset of "income distribution," which, in a vacuum and at a glance, is much more unassuming. Every economy has some amount of income that is distributed among its participants -- this is fine; this is the natural order of things -- and in a capitalist economy, we expect some degree of inequality in this distribution. Those who produce more should receive more income than those who produce less: Welcome to Incentives 101. The distribution of income in a capitalist economy is necessarily unequal, but not necessarily unfair.
One way to measure the distribution of income within an economy is by using the Gini index. The Gini index is calculated from the Lorenz curve, which plots total family income against the total number of families, arranged from poorest to richest. On a graph, if the Lorenz curve plots out to a perfect 45-degree line, then the nation's income is perfectly distributed. The farther away from a 45-degree line the curve bends, the more a nation's income is increasingly unequally distributed.
The Gini index is the ratio of the area between the Lorenz curve and the 45-degree line and the entire area under the 45-degree line. By this measure, zero means incomes are distributed perfectly evenly, with each family taking home an equal share of total income, while 100 means incomes are distributed perfectly unevenly, with just one family taking home all the income.
The U.S. Central Intelligence Agency maintains a list of 136 countries ranked by their place on the Gini index. The country with the highest score, or the most income inequality, is Lesotho, a small nation in southern Africa, with 63.2. The nation with the lowest score is Sweden at 23.
The data used in the calculations are, unfortunately, old. In the case of Lesotho, the data is from 1995. Data from Sweden were collected in 2005. A Gini index maintained by the World Bank isn't much better, but the lesson is still hopefully illustrative -- here is a way to measure the distribution of income within an economy.
Most developed economies score between 23 and 35. France scores 32.7, Italy scores 31.9, Germany scores 27, and Canada scores 32.1.
Getting to the point, the United States scores 45, according to the CIA World Factbook. The data used in the calculation are from 2007, just before the financial crisis; Census data from 2012 put the U.S. at 47.7.
That the U.S. rank on the Gini index has increased over the past few years is hardly surprising. According to a University of California, Berkley report, as much as 95 percent of the new wealth created between 2009 and 2012 has gone to the wealthiest 1 percent. Meanwhile, incomes at the bottom 99 percent grew just 0.4 percent between 2009 and 2012. Between 2007 and 2011, the share of working families considered low income -- meaning their earnings are 200 percent of the official poverty threshold -- increased from 28 percent to 32 percent nationally.