Inequality in America – Surprising Facts About the Rich and Poor

In this post I want to offer some surprising data about the earnings, income, and wealth of the poor and rich. The data are surprising because the rich often dominate both sides of the distribution for any one of these three measures. The rich may, almost by definition, have strong representation when we look at which households have very high earnings (this seems obvious), and yet also include a large number of households with low, or even negative, earnings because many wealthy households incur losses from unsuccessful business ventures. In the latter case the rich have amassed enough savings to live comfortably while they experiment with starting a business. The data I present today are from the fantastic report entitled Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update from the  Federal Reserve Bank of Minneapolis.

A few preliminaries. First, this data comes from the Survey of Consumer Finances from the University of Chicago in collaboration with the Federal Reserve and US Treasury. It samples 4,500 households with an intentional oversampling of the rich, a useful research method for statistical reasons, which I will not bore you with here. There is also a difference between earnings, income, and wealth, which a lot of people use interchangeably in colloquial language.

  • Earnings includes the money you get from all types of work.
  • Income is earnings plus capital income (money from stock dividends or the returns from owning a business) and government transfers (social security, food stamps, and so on).
  • And wealth is the value of all assets, for many people this might include their equity in a house (note too that cash is an asset and so wealth also includes savings and checking accounts).

The report analysis four groups for each of the three categories (earnings, income, and wealth). These groups are the poorest, the poor, the rich, and the richest. I will follow that convention here. There are a lot of references in the data to “the average” so I’ve copied those numbers below:

Earnings:

The earnings-poorest are actually wealthy. They are earnings-poor because of business losses, but have almost twice the average amount of wealth and 86% of the average income (with most of this income coming from capital sources). They are older than average and many have no children. Surprisingly, however, they are not very well educated. They have twice the average high school dropout rate and 10% lower college graduation rates than the average. Over half are retired.

The earnings-poor are still wealthy, and still have negative overall earnings. However, they are less wealthy than the earnings-poorest. Their wealth would put them in the 4th quintile of wealth. They are quite old on average, nearly 65% are over the age of 65. Their low level of education is similar to those of the earnings-poorest.

The earnings-rich are wealthy. Their earnings, income, and wealth are all three times the average. The household heads are prime-age workers, and they are about five years younger on average than the earnings-richest. A little over 65% have completed college and nearly 90% are married. Their income comes more from labor and less from business and capital sources than the earnings-richest.

The earnings-rich are extraordinarily wealthy. According to the report, “Their average earnings, income, and wealth are 19, 19, and 22 times the sample averages [respectively].” About 70% of them belong to the 46-65 year-old age group. Nearly 90% have completed college, almost half are self-employed, and over 96% are married.

Income:

The income-poorest are fairly wealthy. Again, their negative income comes from business and capital losses. The average wealth of this group would put them in the 4th quintile. They are young, with double the sample average of under-31 year-olds. Many did not complete their education. In this group, 45% of households are headed by nonworkers. Almost a fifth are self-employed. Most of the income-poorest are single (82%).

The income-poor are poor. Their average household income is $11,700 and most of this comes from either government transfers (60%) or labor (36%). Many are either quite young — over a fifth are under 31 — or quite old — nearly 35% are over 65. Only 12% are college graduates. According to the report, “Many of these households in this group are headed by either retirees or nonworkers (32 percent each).” And many are single.

The income-rich are rather rich. Their earnings, income, and wealth are all three times the average. Most of their income comes from labor. Their average age is 50 years old. Nearly 70% have completed college and 87% are married. Most of them are workers (69%) or self-employed (20%).

The income-rich are very, very rich. Their earnings are 17 times the average, their income 21 times, and their wealth 26 times. Their income comes largely from capital (30%) and from business sources (28%). Their average age is 56, with 20% over the age of 65. A whopping 85% have completed college, over half are self-employed (51%), and nearly all are married (95%).

Wealth:

The wealthy-poorest are middle income. Their average income is $40,000 and their net worth is $-79,000, over half of which is from student loans (which total, on average, $42,400). They are fairly young, with 86% under the age of 45, twice the sample average. Just over 55% have completed college and only 7% are high school dropouts. Most (73%) are workers, with 17% being nonworkers. Their marital status is similar to the sample average. A small percentage (3.3%) are retirees. Overall, most of these households will be fine over time if their economic situation continues (because they will continue to pay down debt and accumulate savings).

The wealthy-poor are middle income. They are similar to the wealth-poorest. Their average wealth is $-5,300, 79% of their income comes from labor, and they are young, with 68% under the age of 45. Many are single, but a full 25% are high school dropouts, twice the average. The report does not comment on their prospects, but I suspect their general lower level of education may limit career growth and income over the long-term.

The wealthy-rich are at the higher end of the upper-middle class. Their wealth is 4.2 times the average, with their income 2.4 times. Half of their income is from labor (51%), while a substantial amount also comes from capital income (30%). The household head is 58 years on average, over a quarter are retired (27%), and three-quarters are married.

The wealthy-richest are extremely wealthy. Their wealth holdings are 34 times the average and their earnings are 12 times. Their income is split roughly in thirds with labor comprising 30%, capital 34%, and business sources accounting for 32%. The average ages is 59, with 31% over the age of 65. They are well-educated — 86% are college graduates. They are mostly married (91%), and nearly a half (49%) are self-employed.

Inequality:

Inequality, as measured by concentration of earnings, income, or wealth, has also gone up between 1998 and 2007 (the last year for which there is data) as shown by the chart below:

The first ratio is comparing the median with the 30th percentile, and the the second is comparing the 90th percentile with the median. Though the precise language here is tricky, we can roughly say that the 90th percentile household enjoyed 3.41 times more earning than the average American family, 3 times more income, and 7.55 times more wealth. All of these are increases over the ratios in 1998. N-H-W stands for Nonhousehold wealth, which means exactly what it sounds like: wealth that does not come from equity in a house.

The more elaborated data for each of these groups is below:

I recommend reading the whole thing. There is much more interesting data in the report, for example, this chart that shows the characteristics of bankrupt households:

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