IEI Insight: Common measure of income inequality seriously flawed

This IEI Insight is provided by Madelyn McGlynn, a Gail Werner-Robertson Fellow and author of a forthcoming paper on income inequality and the Gini Index.

Income inequality in America is growing quickly. Between the Occupy Wall Street phenomenon and presidential candidates debating solutions, this fact has started to creep into the popular consciousness and has sparked much concern. Income inequality is growing and this can be demonstrated mathematically. But what does that analysis really tell us?

According to Federal Reserve Chairman Janet Yellen, since 1973 the top ten percent of American incomes increased by about 30 percent. The bottom 50 percent of workers’ real income only rose by about five percent. This difference is significant, changes the dynamics of the American economy, and this inequality is not getting any better. Many studies have attempted to determine why this is happening. Researchers tend to conclude that income inequality is exacerbated by gaps in education, an aging labor force, and the presence of concentrated populations.

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