Explaining Income Inequality By Household Demographics, Update For 2014

by: Mark J. Perry

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Now that new detailed Census Bureau data are available for US household income in 2014, and subsequent to Obama's final State of the Union address on Tuesday night, I present my annual post titled "Explaining Income Inequality by Household Demographics" (see my previous versions of this analysis for years 2009, 2010, 2011, 2012 and 2013).

In December of 2013, President Obama called America's "dangerous and growing" income inequality the "defining challenge of our time," and he said he planned to put the topic of income inequality at the center of his agenda during the remainder of his second term. More recently the World Economic Forum cited income inequality in November 2014 as the top threat facing the world in 2015 based on a survey of about 1,800 leaders from academia, business, government, and non-profits. And just yesterday, VP Joe Biden praised Sen. Bernie Sanders for "offering an authentic voice on income inequality." Biden also told CNN that Hillary Clinton has "come forward with some really thoughtful approaches to deal with the issue of income inequality.

The president and vice-president, the World Economic Forum, and presidential candidates Sanders and Clinton are not alone in their concerns about income inequality - there's been a lot of discussion on the issue in recent years, especially concerns about "increasing income inequality." The popularity of that concern is demonstrated by more than 63,000 Google search results for the term "increasing income inequality." However, there's apparently not as much attention or concern about "explaining income inequality" (there are only 5,000 Google search results for that term), and that's the topic that this post will attempt to address.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households. But it's also informative to analyze the demographic differences among income groups at a given point in time to answer the questions like: How are high-income households different demographically from low-income households that would help us better understand income inequality? For low-income households today who aspire to become higher-income households in the future, what lifestyle and demographic changes might facilitate that trajectory to a higher income?

The chart above shows some key demographic characteristics of US households by income quintiles for 2014, using updated data from the Census Bureau's Annual Social and Economic Supplement. Below is a summary of some of the key demographic differences between American households in different income quintiles in 2014:

1. Mean number of earners per household. On average, there are significantly more income earners per household in the top income quintile households (2.0) than earners per household in the lowest-income households (0.42). It can also be seen that the average number of earners increases for each higher income quintile, demonstrating that one of the main factors in explaining differences in income among US households is the number of earners per household. Also, the unadjusted ratio of average income for the highest to lowest quintile of 16.1 times ($194,053 to $11,676), falls to a ratio of only 3.5 times when comparing "income per earner" of the two quintiles: $97,027 for the top fifth to $27,800 for the bottom fifth.

2. Share of households with no earners. Nearly 63% of US households in the bottom fifth of Americans by income had no earners for the entire year in 2014. In contrast, only 4.1% of the households in the top fifth had no earners in 2014, providing more evidence of the strong relationship between household income and income earners per household.

3. Marital status of householders. Married-couple households represent a much greater share of the top income quintile (78.1%) than for the bottom income quintile (16.9%), and single-parent or single households represented a much greater share of the bottom one-fifth of households (83.1%) than for the top one-fifth (21.9%). Like for the average number of earners per household, the share of married-couple households also increases for each higher income quintile, from 17% (lowest quintile) to 34.3% to 48% (middle quintile) to 64% to 78% (highest quintile).

4. Age of householders. More than 7 out of every 10 households (70.9%) in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to fewer than half (43.4%) of household members in the bottom income quintile who were in that prime earning age group last year. The share of householders in the prime earning age group of 35-64 year olds increases with each higher income quintile, from 43.4% to 71%.

Compared to members of the top income quintile of households by income, household members in the bottom income quintile were 1.5 times more likely (22% vs. 14.7%) to be in the youngest age group (under 35 years), and more than twice as likely (34.5% vs. 14.5%) to be in the oldest age group (65 years and over).

By average age, the highest three income groups are the youngest (49-50 years) and the lowest income group is the oldest (54.2 years).

5. Work status of householders. About four times as many top quintile households included at least one adult who was working full-time in 2014 (76.8%) compared to the bottom income quintile (only 18.8%), and nearly five times as many households in the bottom quintile included adults who did not work at all (68.8%) compared to top quintile households whose family members did not work (14%). The share of householders working full-time increases at each higher income quintile (18.8% to 46.1% to 60.5% to 69.7% to 76.8%).

6. Education of householders. Family members of households in the top fifth by income were 4.5 times more likely to have a college degree (62.2%) than members of households in the bottom income quintile (only 13.7%). In contrast, householders in the lowest income quintile were about 12 times more likely than those in the top income quintile to have less than a high school degree in 2014 (25.1 % vs. 2.1%). As expected, the Census data show that there is a significantly positive relationship between education and income.

Bottom Line: Household demographics, including the average number of earners per household and the marital status, age, and education of householders are all very highly correlated with household income. Specifically, high-income households have a greater average number of income earners than households in lower-income quintiles, and individuals in high-income households are far more likely than individuals in low-income households to be well educated, married, working full time, and in their prime earning years. In contrast, individuals in lower-income households are far more likely than their counterparts in higher-income households to be less-educated, working part time, either very young (under 35 years) or very old (over 65 years), and living in single-parent households.

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever. Fortunately, studies that track people over time indicate that individuals and households move up and down the income quintiles over their lifetimes, as the key demographic variables highlighted above change, see CD posts here, here and here. And Thomas Sowell pointed out in his column "Income Mobility" that:

Most working Americans who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%. People who were initially in the bottom 20% in income have had the highest rate of increase in their incomes, while those who were initially in the top 20% have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people.

It's highly likely that most of today's high income, college-educated, married individuals who are now in their peak earning years were in a lower-income quintile in their prior, single, younger years, before they acquired education and job experience. It's also likely that individuals in today's top income quintiles will move back down to a lower income quintile in the future during their retirement years, which is just part of the natural lifetime cycle of moving up and down the income quintiles for most Americans.

So when we hear Obama, Bernie Sanders, Hillary Clinton and the media talk about an "income inequality crisis" in America, we should keep in mind that basic household demographics go a long way towards explaining the differences in household income in the United States. And because the key income-determining demographic variables are largely under our control and change dynamically over our lifetimes, income mobility and the American dream are still "alive and well" in the US.