Income Inequality Measurement Sensitivities

This study measures both the current state of income inequality and its change over time (since 1982), paying particular attention to how different definitions of income and the choice of economic unit (individuals or families) influence the results.

Earnings, a narrow definition of income consisting largely of wages, salaries, and net small business income, have the highest level of inequality, one which has increased sharply since 1982. But this measure ignores a number of critical factors that temper inequality and its growth over time. Specifically, fewer families (and individuals) have earnings than was the case 30 years ago, many more people (students, seniors, welfare recipients) are receiving government transfers now, and families have gotten smaller. Accounting for these important changes—and choosing a broader definition of income—provides a very different view of inequality.

After-tax income includes government transfers and income taxes. Adjusted for family size to take account of the number of people supported by the family’s income, it is therefore a much better reflection of the family’s actual living standard. Using this measure, we find that family income inequality between 1982 and 2010 has risen between 6.5 and 12.9 percent, depending on the inequality indicator used. This is a far more modest increase than many other studies show.

Moreover, the results using after-tax incomes of individuals show that income inequality is essentially the same or perhaps even slightly less than in 1982. This important result stands in contrast to the simplistic view that income inequality is unambiguously rising.