How Does Income Inequality Compare across U.S. States and around the World?

Thursday, July 31, 2014

Tuesday’s blog post featured a Regional Economist article that discusses how wealth inequality in the U.S. may be a larger concern than income inequality. Today’s post will look at another aspect highlighted in the article: how income inequality compares across U.S. states and across countries.

In the article, Research Director and Economist Christopher Waller and Senior Research Associate Lowell Ricketts, both with the St. Louis Fed, measured income inequality in the U.S. using a simple ratio. They divided the median income of the top 10 percent of the income distribution ($203,900) by the median income of the bottom 10 percent ($9,900), resulting in a ratio of 21.

Income Inequality among States

Waller and Ricketts calculated the same ratio using the median of the five highest state per capita personal incomes divided by the median of the five lowest in 2012.1 The interstate inequality ratio was 1.4. The authors noted, “This makes sense: The rich and poor aren’t concentrated in one state over another, and the earnings potential is mostly similar across states.”

Income Inequality among Countries

To begin looking at income inequality among countries, Waller and Ricketts examined the 34 member nations of the Organization for Economic Cooperation and Development (OECD). They divided the median gross domestic product (GDP) per capita of the top four performers by the median GDP per capita of the bottom four, which resulted in a ratio of 7.7.2

The authors noted that the developing nations in the OECD are far more advanced than much of the developing world. To obtain a larger sample, they used the International Monetary Fund’s World Economic Outlook database, which contains data on 189 countries.

Waller and Ricketts ran two calculations for world income inequality, dividing the 2012 median GDP per capita of the top 19 countries by the median GDP per capita of the bottom 19 countries. Because the sampling of the bottom 19 countries contained almost exclusively African nations (thus providing very little geographic diversity), the first calculation excluded African nations. This resulted in a global inequality ratio of 38.2.3 Adding the African nations into the calculation raised the ratio to 99.

Waller and Ricketts noted, “While not to diminish the ample income inequality in the U.S., a focus on absolute inequality would suggest income disparity among the world’s population is a far greater concern. To put things in perspective, the poorest 10 percent of the U.S. income distribution hold a median income that is more than seven times that of the poorest 19 developing nations [excluding the African nations]. Upward income mobility is out of the question when basic human rights (food and water, medical care, safety) are not available.”

Notes and References

1 The five highest state per capita personal incomes belonged to North Dakota, Connecticut, Wyoming, Massachusetts and South Dakota. The five lowest state per capita personal incomes belonged to Hawaii, New Mexico, Arizona, Idaho and Utah.

2 The top four countries in terms of 2012 per capita income were Luxembourg, Norway, Switzerland and Australia, with median GDP per capita of about $89,300. The bottom four countries were Poland, Hungary, Turkey and Mexico, with a median GDP per capita of about $11,500.

3 The median GDP per capita of the top 19 countries was about $51,700 and of the bottom 19 countries was about $1,400.

Additional Resources

Posted In Financial  |  Tagged christopher wallerincome inequalitylowell rickettswealth inequality
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