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A Guide to Describing the Income Distribution

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A Guide to Describing the Income Distribution A Guide to Describing the Income Distribution Sarah A. Donovan Analyst in Labor Policy February 5, 2015 Congressional Research Service 7-5700 www.crs.gov R43897 A Guide to Describing the Income Distribution Summary The distribution of income in the United States features heavily in congressional discussions about the middle class, program funding and effectiveness, new and existing target groups, government tax revenue, and social mobility, among other topics. Recently, the level and distribution of U.S. income have also been raised in the context of broader macroeconomic issues, such as economic growth. Accordingly, Congress has sought information on the absolute and relative experience of U.S. households, the range of incomes, and their dispersion. Describing the income distribution involves several important choices about the definition of income and the level at which income data are examined. Income can be constructed narrowly (e.g., earnings only) or broadly (e.g., as the sum of earnings, capital gains, government transfers, and other sources); it can be presented in pre-tax status or reflect taxes paid and tax credits received. Income can be presented at the individual level or represent pooled resources among households, families, or tax units. These choices about how to define income affect the magnitude of income indicators and the shape and range of the U.S. income distribution. For this reason, disagreement over the interpretation of income levels and trends frequently centers on how income is defined. This report is a guide to various measures, indicators, and graphics commonly used to describe the U.S. income distribution. It examines the complexities of income measurement, outlines important definitional and data considerations to bear in mind when using and interpreting income statistics, and reviews descriptive statistics commonly used in analysis. It also discusses the Gini index, a popular summary measure of income dispersion and an appendix presents information on additional summary indicators of income dispersion reported annually by the U.S. Census Bureau. The report provides descriptive analysis of the U.S. income distribution to illustrate various concepts and data presentation strategies. This analysis reveals broad trends, but does not provide an exhaustive study of the distribution of income in the United States. Importantly, the report does not explore potential drivers and impacts of changes to the shape and span of the distribution. Census data show a gap in income between households at the top of the distribution and those in the middle and bottom of the distribution. In 2013, household income at the 90th percentile was $150,000, whereas household income at the 10th percentile was $12,401. Said another way, household income at the 90th percentile was 12.1 times the level of household income at the 10th percentile. Median household income in 2013 was $51,939, up from $49,594 in 1993 (in 2013 dollars). Census data reveal growing concentration of income at the top of the distribution between 1993 and 2013. Households in the top 20% of the distribution earned 51% of total household income in 2013, compared to 48.9% in 1993 (an increase of 4.3%). The share of total income among the bottom 20% of households was 3.2% in 2013 and 3.6% in 1993 (a decrease of 11.1%). In addition, Census calculations indicate that the Gini index increased from 0.454 in 1993 to 0.476 in 2013, indicating increased dispersion of household income. Congressional Research Service A Guide to Describing the Income Distribution Contents Introduction ...................................................................................................................................... 1 Measuring Income ........................................................................................................................... 1 Defining Income ........................................................................................................................ 2 Defining Income: Three Areas of Special Consideration .................................................... 3 How Definitions Affect the Income Distribution: An Illustration ....................................... 6 Level of Analysis ....................................................................................................................... 7 Income Data ..................................................................................................................................... 8 Census Data ............................................................................................................................... 8 IRS Records ............................................................................................................................. 10 Data Used in this Report ................................................................................................................ 10 Describing a Distribution: The Basics ........................................................................................... 11 Describing the Typical Household ........................................................................................... 11 Characterizing the Breadth and Shape of the Distribution ...................................................... 12 The Frequency Distribution ..................................................................................................... 13 Making Comparisons ..................................................................................................................... 15 Quantiles: Comparing Income Groups .................................................................................... 15 Trends: Making Comparisons over Time ................................................................................ 16 Trends in Median Income .................................................................................................. 17 The Changing Shape of the Distribution: Mean-to-Median Ratio .................................... 17 Quantile Analysis over Time ............................................................................................. 19 Comparing Income by Geographical Location ....................................................................... 24 Variation in Median Household Income across States ...................................................... 24 Accounting for Regional Price Variation .......................................................................... 25 Gini Index ...................................................................................................................................... 26 Figures Figure 1. Households at the Bottom and Top of the Distribution for Three Census Definitions of Household Income, 2007 ....................................................................................... 7 Figure 2. Symmetric and Skewed Distributions ............................................................................ 13 Figure 3. Distribution of Household Income, 2013 ....................................................................... 14 Figure 4. Median Household Income, 1993-2013 ......................................................................... 17 Figure 5. Mean-to-Median Ratio, 1993-2013 ................................................................................ 18 Figure 6. Mean Quintile Income, 1993-2013................................................................................. 19 Figure 7. Income Ratios, 1993-2013 ............................................................................................. 20 Figure 8. Cumulative Percentage Change in Income Ratios, 1993-2013 ...................................... 21 Figure 9. Quintile Shares of Total Income, 1993-2013 .................................................................. 22 Figure 10. Cumulative Change in Quintile Shares of Total Income Since 1993 ........................... 23 Figure 11. Median Household Income by State, 2013 ................................................................... 24 Figure 12. BEA Regional Price Parities by State, 2012 ................................................................. 25 Congressional Research Service A Guide to Describing the Income Distribution Figure 13. The Relationship Between the Lorenz Curve and Gini Index ...................................... 26 Figure 14. Two Lorenz Curves with the Same Gini Index ............................................................ 27 Figure 15. Gini Index for the United States, 1993-2013 ................................................................ 28 Figure A-1. Mean After-Tax Income within the Top Income Quintile, 2011................................. 30 Tables Table 1. Three U.S. Census Bureau Household Income Definitions ............................................... 5 Table 2. Quantile-based Measures of Household Income Dispersion, 2013 ................................. 16 Appendixes Appendix A. Describing Incomes at the Top of the Distribution ................................................... 29 Appendix B. Summary Indicators Reported by Census ................................................................ 31 Contacts Author Contact Information........................................................................................................... 32 Congressional Research Service A Guide to Describing the Income Distribution Introduction The distribution of income in the United States features heavily in congressional discussions about the middle
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