Wednesday, November 2, 2011

About that one percent

I have done a fair amount of research on wage and income distributions in the US and Latin America over the years.  Unfortunately I was not clever enough to focus on the top 1 percent (I worried about medians and deciles), otherwise maybe the work would have drawn more attention and/or notoriety.  A household must make (after taxes) more than $350k to be in the top 1 percent, whereas $140k will put a household in the top 5 percent.  

Regardless of how you cut the data, they show that the share of income going to the top 1 percent of the distribution has increased dramatically over the last 40 years.  I hate to sound like a climate scientist, but one really cannot have an argument about this.  One can have a legitimate argument about what this really means.  Here are a few of the major issues (for more, see this post):
  1. The data that are most frequently used in public discussions pertain to households.  Forty years ago a large share of those households consisted of a working adult make, a nonworking adult female and some children.   As any watcher of "Modern Family" knows, today's households rarely fit that mold.  Most women work, and highly educated women with significant earnings potential in the labor market are more likely to marry males with a similar profile.  That puts two high income individuals in the same household and increases that household's share of the overall GDP.  Also, there are more single person households.  Bottom line: it is hard to compare apples to apples in the income distribution because of demographic changes. 
  2. The same households are not in the top 1 percent every year.  You can land in the top 1 percent if you sell a business or cash out stocks at just the right time.  There also is fluidity across the various deciles.  Some studies have shown that the amount of fluidity from year to year has gone down, which is a matter of concern.  Bottom line: Warren Buffett and LeBron James are in the top 1 percent every year but they get a lot of one time wonders as company each year.
  3. Most studies use self-reported income from Census Bureau phone interviews.  This measure excludes taxes and often does not include transfer payments, especially in kind payments such as Medicare and Medicaid.  
  4. Some recent studies show that inflation rates vary across different income groups.  The median income family shops at WalMart and Kohls, whereas the top 1 percent shop at Saks and Neiman Marcus.  Prices have increased much less slowly at the former than the latter.  This point becomes important when one makes 40 year comparisons of average income at different ranges of the income distribution. 
Has there been a widening of income inequality?  No doubt.  But some studies exaggerate the increase because they fail to control for all of the important variables.


  1. You wrote, "$140k will put a household in the top 5 percent." As per this website, your claim appears to be wrong:

    $140k would put the household in the top 14%.

  2. I was using Congressional Budget Office data that subtracts taxes and adds transfer payments. The Census data you cite represent money income without those two adjustments. In that data set $190k seems to be close to the 5% cutoff.