Inequality is a topic of obvious concern worldwide. Nevertheless, problems arise when we measure inequality without a standard definition. Not having a unique and unambiguous definition has the consequence that different measures can lead to different conclusions.
Inequality is largely assessed by measuring three different variables: income, consumption and wealth. The most popular and publicized of these are income and wealth.
Income inequality has been a hotly debated subject, especially since the economic crisis began. Professor Emanuel Saez, a collaborator of the famous economist Thomas Piketty, says that 95 percent of income growth in the U.S. that took place after the crisis went to the top 1 percent.
However, in his work “Striking it Richer,” Saez based his claim on a “market” income definition that doesn’t take into account Social Security, unemployment insurance, food stamps and other income derived from government programs. Measuring inequality this way, without considering the income effects of government programs, always results in higher disparities in income between social classes.
When government transfers and the income from owning shares are included in the income definition, we get a different story. According to Stephen Rose’s article, “The False Claim That Inequality Rose During the Great Recession,” we learn that the group that saw the largest income decrease from 2007-2012 is the top 1 percent, who lost about 27 percent of their income and dividends. They also lost a great deal of principal as stock markets plummeted during the crisis.
And yet, Credit Suisse, the investment bank, showed in its 2014 “Global Wealth Report” that wealth inequality has grown wider as economies recover. Overall, despite the complicated global economic situation, global wealth reached a new record, rising by $20 trillion, to total $263 trillion, between mid-2013 and mid-2014. The fact that wealth inequality has increased while the total amount of wealth has also increased is worrisome.
Both wealth and income inequality are also often measured by indices. By far the most widely used is the Gini index, measured from 0 to 1. A coefficient of one implies a completely unequal society where all income or wealth goes to one person, and zero implies a totally equal society where everyone gets exactly the same. According to The Economist, the 2014 Gini coefficient for income inequality in the U.S. was .63. When wealth inequality was measured for the same year, it was .78. Both of these figures are quite high. In terms of wealth inequality, the U.S. has one of the highest figures in the world.
Looking back to 2008, what happened was that wealthy people lost a large amount of both income and wealth during the beginning of the recession. These people then, on average, more than recovered after 2009. In the end, people with the highest incomes and wealth did far better as the recovery progressed. While inequality may not have risen much due to the huge losses from the Great Recession, if current trends continue it will undoubtedly increase.
The world is far from having a single, unambiguous, comprehensive measure of inequality. Consequently, it is not easy to study inequality. Many use statistics to draw conclusions while not telling the whole story. Therefore, each study must be assessed by taking into consideration the strengths and weaknesses of each inequality measure. What we can say about inequality, as quantified by most measures, in the U.S. in general, it is growing again. How much and toward what end are harder to conclude.
The many ways to measure economic inequality (Pew Research): Act Now
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.
Mario Mercado, Hoffmire’s colleague at Progress Through Business, did the research for this article.