Inequality II

by Russ Roberts on May 17, 2005

in Inequality

In the first post in this series, I wrote about what most people consider the state of economic inequality in America:

The gap between the rich and poor is getting wider

The average American is not just falling behind but becoming worse off in absolute terms

There’s less economic mobility in America than there used to be

When people worry about how the poor are doing over time, or the gap between rich and poor, say between 1970 and today, they are usually comparing two snapshots, a snapshot of the rich  and poor in 1970 and a snapshot of the rich and poor today.  If we find that the ratio of rich income to poor income is higher today than it was in 1970, it presumably either means that the rich have gotten richer and the poor have gotten poorer or that both groups are richer but the rich have gotten richer at a faster rate than the poor.

Let’s take the first case where the gap has widened because the poor are poorer, a commonly held view as I argued above.  Implicit in that statement is that some people (the poor) have become worse off than they were in 1970.  But it ain’t necessarily so.  The people in 2000 are not the same people in 1970.  Tha’ts obvious—some people have died and others have been born.  But more importantly, the composition of the population has changed.  The demographics of America have changed.  Comparing 1970 to today without controlling for the effects of those demographic changes cna be very misleading.

Suppose for example that the average age of the population in 2000 was a lot lower than in 1970.  We wouldn’t conclude from that that we’d stopped the aging process—that people were getting younger.  We’d understand that there were more people in the younger cohorts than in the older ones.  If indeed the population were younger in 2000 than 1970, we wouldn’t then simply look at the wage rate of the average worker to determine how the poor were faring in America.  We’d expect younger workers to make less than older workers.  Measured economic progress would have reversed but the underlying opportunity in the economy might not have changed at all.

Now, I have no idea what has happened to the age distribution between 1970 and 2000.  My point is that you want to make sure that you control for such demographic effects when you draw conclusions about opportunity in America today vs. 1970.

Most of the studies of of economic progress and income inequality over time in America are based on Census data that looks at households. In the next post, I will look at two dramatic cultural changes that have affected the composition of households.  Without correcting for those changes, any conclusion on inequality or the progress of the poor has to be taken with a lot of grains of salt.

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