Seeking Alpha
What is your profession? ×
Medium-term horizon, research analyst, macro, oil & gas
Profile| Send Message|
( followers)

When discussing the increase in income inequality, economists forget those people who have no income at all. According to the Census Bureau, there are tens of millions reporting no income every year and this number has really been growing since 1990, as Figure 1 shows. Notice also the dramatic fall in 1978, which was caused by a revision to income definition. More than 15,000,000 were added to income gainers in a few seconds.

The total population has also been growing by approximately 1% per year. Figure 2 depicts the ratio of the number if people without income and the total working age population (15 years of age and over). This ratio has been growing since 1990 as well and there was no specific acceleration after 2007. It is not clear why these people have been excluded by the Census Bureau from the reported measure of income inequality in the U.S. - the Gini ratio. Figure 3 displays three estimates of the Gini ratio. Black line presents the estimates published by the Census Bureau which are obtained for people with income only. Red line shows our estimates obtained from personal income distributions (PID) published by the Census Bureau. The difference with the official figures between 1998 and 2011 is 0.011. This difference is likely related by the fact that we introduced a more accurate approximation of the PID in the lower and higher income bins. In any case, this difference is constant and negligible. One may correct any of the estimates by 0.011 and compensate for the gap. Therefore, we can use our method to estimate the Gini ratio and apply it to the PID including those without income.

When more than 30,000,000 people with zero income are added, one should expect a dramatic increase in Gini ratio. Essentially, thirteen percent of working population adds to zero income whichshifts the Lorenz curve further from the bisecting line. The blue line shows the estimates of Gini ratio for the whole working age population. Unlike the red line, the blue line has been rising since 1990.

The period after 2007 is characterized by an accelerated growth, which is obviously associated with the increasing number of zero-incomers. For people with income, the Gini ratio is rock solid over the whole period between 1967 and 2011 (with an almost negligible negative trend). Interestingly, there is no sign of the revision to income definition in 1977. Despite the fact that those 15,000,000 who were added in 1978 likely had negligible incomes, they did not change the overall personal income distribution. This effect deserves a detailed investigation.

In physics terms, it is a mistake to neglect a substantial part of a closed system when calculating aggregate variables. Such aggregates are intrinsically biased and cannot characterize the system and its behavior. Currently, the income inequality in the U.S. is much higher than the Census Bureau reports: the Gini ratio is rather 0.58.

(click to enlarge)

Figure 1. The number of people without income according to the Census Bureau's definition.

(click to enlarge)

Figure 2. The portion of population without income

(click to enlarge)

Figure 3. Three estimates of Gini ratio as described in the text.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.