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Income Inequality Is Not As Bad As Some People Think

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The lament about the rich getting richer and poor getting poorer may be a misreading of the data.

Income inequality is one of those easily understandable, very vogue areas of economics that is used to formulate "fairness" in public policy. But what if the numbers aren't what they seem?

Data analyzed across a wide variety of studies show magnitudes of variation about the wealth held by the top 10 percent of households compared to the rest. Everyone's income is increasing, but those at the top are increasing at a faster pace, according to the studies.

But that may not be an entirely accurate reflection of the world at hand. Economist Aparna Mathur argues that new research reveals some problematic methods that skew results on income inequality reporting.

A growing literature in economics has identified problems with measuring income accurately and completely in various datasets. If income is under-reported, particularly for low-income workers, then we may overstate the rise in inequality.

Moreover, income does not fully capture a household’s standard of living. Among other issues, at very young or very old ages, individuals may borrow or rely on lifetime savings to maintain their standard of living. Income may not perfectly capture how well off people are at different points in the life cycle.

Let’s begin with the measurement issues. Research in economics has shown that when households are surveyed, individuals don’t always accurately report benefits and transfer payments such as Medicare, Medicaid and Food Stamps.

However, such programs have grown in importance over the last several decades precisely to supplement incomes at the bottom of the distribution. Economists Bruce Meyer and James Sullivan show that when comparing data from the Current Population Survey to administrative data aggregates (the most accurate data), the ratio of reported benefits to actual benefits is 0.6 for Food Stamps and 0.5 for TANF.

In other words, receipts reported on household surveys are more than 40- to 50-percent lower than those in administrative data.

Likewise, using tax return data also disguises actual income.

How can that be? Well, “consistent market income” includes employer-paid payroll taxes and insurance. Tax return data doesn't show government transfer benefits. Likewise, households may also under-report income when there is a high and low income earner under the same roof.

Incorporating unreported income sharply reduces the overall acceleration by top-level earners.

What’s a better way of measuring equality or lack of? Mathur claims that consumption data more accurately reflect a family’s standard of living than income alone.

According to her research, there was little change in consumption inequality between 1984 and 2010. Technologies like air conditioning and heating, Internet, computers and printing facilities, microwaves, dishwashers and other household appliances (can you say "smart phones"?) have become more widely available to everyone regardless of income, and now almost everyone has these goods in their homes.

In other words, access to material goods has increased significantly for the lowest income households, and the gap in access to these goods between high and low income households has narrowed over time.

In the long run, the real issue is not about differences in incomes at all.

Are low-income people today able to access opportunities to move up the income ladder?

Can they access good schools for their children and good jobs for themselves? How do we make single-parent families more upwardly mobile? Our energies should be focused not, as they too often are, on why incomes are growing rapidly at the top and ways to constrain that growth, but on improving wage growth and mobility at the bottom of the distribution.