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Growth in Income Inequality Not the Same across the Nation

Tuesday, February 24, 2015

Income inequality has been a frequent topic of conversation in current economic discussions. Much of the focus has been on the national level, but an article in the most recent issue of The Regional Economist showed that income inequality isn’t growing at the same rate across the country.

Economist Maximiliano Dvorkin and Research Analyst Hannah Shell, both with the Federal Reserve Bank of St. Louis, looked at the growth in income inequality in the Eighth Federal Reserve District and how it compared to the nation as a whole. The authors used data from the annual March supplement of the Current Population Survey,1 and examined earnings (which represents gross labor income) and disposable income (which is how much individuals have left from all income sources after paying taxes and receiving government benefits).

District Inequality

Within the Eighth District, the ratio of the income of a person in the top 10 percent of the income distribution to that of a person in the bottom 10 percent has grown from 5.7 to 6.2 over the period 1979-2009. This means an individual at the top of the distribution earned a little more than six times what someone at the bottom earned in 2009.

Furthermore, the growth in the gap was entirely due to growth at the top of the distribution. During the period studied, income in the 90th percentile grew by more than 8 percent in real terms, while income in the 10th percentile was essentially flat.

Eighth District vs. the U.S.

Income inequality in the Eighth District grew more slowly than in the nation as a whole. The table below shows this comparison using Gini coefficients, which measure inequality across a distribution and give a value between zero (perfect equality) and 1 (perfect inequality).

income inequality

Regarding inequality measured by annual earnings, Dvorkin and Shell wrote, “By this measure, the U.S. and the Eighth District started at the same place in the beginning of our analysis, but ended with income inequality for the nation higher than income inequality in the Eighth District.”

For inequality measured by disposable income, the Eighth District matched the pace of the U.S., though the level of inequality remained below the U.S. in both periods studied.

Top vs. Middle Earners, Middle vs. Low Earners

Dvorkin and Shell also studied top- and middle-income earners and middle- and low-income earners to see the growth in gaps between these groups. For the period 1979-2009, the top- and middle-income earners started with ratios of around 2—meaning top-income earners (those in the 90th percentile of the income distribution) made twice as much as middle-income earners (those in the 50th percentile)—for both earnings and disposable income. By the end of the period, the U.S. top-income earners were earning more than 2.4 times the middle class. In the District, these top individuals were earning about 2.3 times more.

For the middle- and low-income earners (those in the 10th percentile), however, the level of inequality did not dramatically increase over the period studied. Dvorkin and Shell wrote, “In sum, income inequality is increasing primarily in the upper end of the distribution, between the top-income earners and the middle-income earners.”

Dvorkin and Shell concluded, “The above analysis shows that although income inequality in the Eighth District has increased, it has done so at a slower pace than in the nation as a whole. Moreover, despite the different paces of increase, both the U.S. and the Eighth District have experienced increased income inequality primarily in the upper end of the distribution.”

Notes and References

1 The Eighth District consists of all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. However, the data were not broken out by Federal Reserve district, so the analysis for the Eighth District used the data for all of each state except Illinois. While part of Illinois is in the District, it was excluded because most of the state’s population, including Chicago, lies outside the District.

Additional Resources

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