Income Distribution Reality
By Arnold Kling
In his new book Unequal Democracy, Larry Bartels writes (p.7),
families at the 20th percentile experienced declining real incomes in 20 of the 58 years…by comparison, families at the 95th percentile have experienced only one decline of 3% or more in their real incomes since 1951.
I have a nit to pick, which is that Census department percentiles are not families.
Suppose that we start out with 20 families, and the 4th-lowest family (the 20th percentile) has an income of $10,000, while the 3rd family has an income of $9500. Next year, suppose that everyone’s family income rises by 2 percent, but we add a new family at the bottom of the income distribution, with an income of $6000. As a result, the new 20th percentile is now somewhere between the income of the original 3rd family (now the 4th family out of 21) and the original 4th family (now the 5th family). The income of the 20th percentile goes down, even though the income of every family has gone up.
Next, consider what happens when you have millions of families, and you add lots of new families each year. Because new families (immigrants and young families) tend to join the income escalator at the bottom, it should be no surprise that the bottom percentile shows declines more frequently than the top percentile.
I do not want to succumb to disconfirmation bias, which is the tendency to find one thing wrong with something you disagree with and then dismiss the whole idea. But I have a hard time buying into stories about income inequality that look at the behavior of census percentiles over time. At the very least, the author ought to be clear that movements in census percentiles are not the same as movements in families. Bartels is the opposite of clear on that point.
Another issue that people raise with Census data is that the basic unit is the household. If a household breaks into two households, due to divorce, average household income plunges by 50 percent, even though nobody’s income has changed. Trends in household income tend to look worse than trends in income per person.
I think that if you are going to write a treatise on income inequality in America, you have no choice but to slog through the data sets that track particular families over time, meaning the National Longitudinal Survey and/or the Michigan panel on Income Dynamics. From time to time, I have considered doing the slogging, just because I am highly curious about this issue of family income dynamics vs. the movement in census percentiles. However, I would need a colleague who could help me up the learning curve with the data.
UPDATE: See Bartels’ reply in the comments.