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Friday, March 25, 2011

Inequality Data

Steven R. Cunningham of the American Institute for Economic Research writes:

Government data, if misunderstood or improperly used, can lead to many false conclusions.

For example, from 2000 to 2009, inflation-adjusted household income fell 4.5 percent, but consumer spending increased 22.4 percent. This raises an obvious question: How did people dramatically increase spending on shrinking paychecks?

The answer is: They didn't.

They did increase spending. But paychecks weren't shrinking. Instead, the number of individuals per U.S. household was shrinking, which lowered the average.

Real disposable income, which is essentially total after-tax income, rose 25.2 percent from 2000 to 2009. At the same time, however, households got smaller, as more people divorced, or rejected or delayed marriage. So total spending went up, while average household income - due to the larger number of households - went down.

Like household income data, income distribution data often are misunderstood. For purposes of analysis, the Census Bureau divides households into fifths - or quintiles - yielding the bottom 20 percent of income earners, the next 20 percent, and so on, up to the highest 20 percent.

While this is a reasonable approach, it can be extremely misleading.

We often hear, for example, that the top 20 percent of U.S. households receive roughly 50 percent of total income, while the bottom 20 percent receives less than 4 percent. According to the Census Bureau's household data and quintile distribution, this is correct.

The problem is that we are not told that the top 20 percent of households includes four times as many workers as the bottom 20 percent, and nearly six times as many full-time, year-round workers. Knowing this makes a lot of difference in interpreting the original statement.