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Measures of income inequality

In every large society, people differ from each other in occupation, income, manner of living, power, privilege and popular esteem. Some groups enjoy higher status than others. Sociologists call this separation of groups into layers as social stratification. In some societies the dividing lines are clear-cut and rigid, in others they are merely approximate and easily crossed. Measures of income inequality alone do not adequately measure a society’s stratification system.

To gain an accurate picture of the distribution of a society’s economic resources, we also examine wealth, which includes savings, investments, homes, and property. Wealth represents accumulated assets of “stored-up” purchasing power. Historical Background Historical trends in the distribution of wealth show that the Colonial and immediate post-Revolutionary periods were the most egalitarian in U. S. history (Smith, 1984; Williamson and Lindert, 1980). In other words, wealth was more equally distributed during this period than at any other time.

Between the early nineteenth century and the beginning of the great Depression in 1929, economic inequalities increased. During the Great Depression and World War II, the distribution of wealth became significantly more equal. From the end of World War II to 1963, an overall increase occurred in the concentration of wealth; but then it declined, so that by 1976, for the first time in the twentieth century, the wealthiest 1 percent of Americans owned less than one-fifth (19 percent) of the nation’s total assets (Wolff, 1992a).

However, the most recent data available indicate that during the 1980s the trend toward more equitable distribution of wealth was dramatically reversed (Kennicknell and Shack-Marquez, 1992). By 1989, wealth had become more heavily concentrated among the superrich than at any time since 1929; by 1989, the wealthiest 1 percent of American families accounted for 37. 7 percent of the nation’s total wealth, of nearly double what their share had been in 1976. This increasing concentration was especially pronounced among the very richest families, the top one-half of 1 percent, which accounted for 31 percent of the total.

Indeed, these superrich families were the only category to increase their wealth during the 1980s; the percentage of wealth held by even the next richest one-half of 1 percent declined (Wolff, 1992b). Distribution of Wealth Thus, wealth is much more unequally distributed and heavily concentrated in the upper extremes than is income. Whereas the highest fifth of the population received 44. 6 percent of the nation’s income in 1989, the wealthiest quintile of families accounted for 83. 6 percent of the nation’s net worth (U. S.

Bureau of the Census, 1990b; Wolff, 1992b). The unequal distribution and concentration of wealth in American society is even more apparent if one distinguishes between net worth and financial wealth or net financial assets. Most studies of the distribution of wealth have relied on measures of net worth, which refers to the difference between a household’s assets and its liabilities. However, the net of worth of most Americans who have accumulated some wealth is held almost exclusively in the investment that they have in their homes and automobiles.

Oliver and Shapiro (1989) have therefore argued that the most accurate measure of the concentration of wealth in the United States should exclude equity in homes and vehicles, since these can seldom be converted to other purposes (such as financing a college education, establishing or expanding a business, or paying for emergency medical expenses). The term net financial assets (NFA) refers to household wealth after the equity in homes and vehicles has been deducted.

If this measure of wealth (rather than net worth) is used, figures on the overall distribution of wealth of American households and in equalities in the distribution of wealth in the American society dramatically. Oliver and Shapiro found that, although the overall household median net worth in 1984 was $32,609, household median net financial assets were only $2599 (slightly less than for a family of four to live at the poverty level for only 3 months). Moreover, one-third of all U. S. households had zero net worth; that is, their debts outweighed their financial assets.

On the other hand, net financial assets were even more highly concentrated than income and net worth. Whereas the top 20 percent of American households earned over 43 percent of all income, the same 20 percent accounted for 67 percent of all net worth, but nearly 90 percent of net financial assets (Oliver and Shapiro, 1989). Changes in Extreme Inequalities of Wealth In more recent studies, Wolff (1992a, 1992b) examines 1989 data to determine whether these extreme inequalities in wealth had changed during the 1980s.

Using a measure (“financial wealth”) similar to net financial assets, he found that between 1983 and 1989 median family NFA actually declined; in 1989, the typical American family had fewer disposable financial resources that they had in 1983. However, during these same period, which was characterized by sustained economic expansion, the increase in the nation’s wealth was experienced almost exclusively by the wealthiest Americans; the top half of 1 percent of the wealthiest families (which Wolff termed the “superrich”) accounted for more than half (55 percent) of the nation’s total increase in household wealth between 1983 and 1989.

During the 1980s, the concentration of wealth became more extreme than at any time since the 1920s; by 1989, the superrich owned 40 percent of the nation’s NFA (compared to 34 percent in 1983). Whereas the top they held 94. 3 percent of all net financial assets (Wolff, 1992b). as these recent trends indicate, then, the United States is a society in which both income and wealth are unequally distributed, and during the 1980s these inequalities increased substantially.

Effects of these changes How have these changes affected movement into and out of the middle class? Duncan et al. (1992) followed a nationally representative sample of families for more than 20 years (1968 – 1989) to determine how their mobility was affected by broad economic changes during this period. Using two different measures, they found that the proportion of American adults who could be broadly defined as middle class declined from 78 percent to 67 percent in 1986.

Some of the declined occurred because some people moved into upper-income categories. However, an even greater percentage dropped out of the middle class joined American’s poor. The 1980s “were simultaneously a time of enhanced upward mobility [especially for the college educated] and more frequent downward mobility. . . . The probability of failing from middle-income to lower-income status increased significantly after 1980” (Duncan et al. , 1992, pp. 36, 38).

Moreover, they contend that, given the underlying conditions producing these trends, the recession of 1990 – 1992 should have further reinforced the increase in upper-middle-class opportunity, but greatly enhanced the probability of downward mobility for lower-income members of the middle class. Commenting on the impact of this erosion of the middle class, which he characterizes as “one of America’s greatest crises,” Phillips (1993) contends that disenchantment as a result of the decline of the middle class will provide the underlying basis for politics in the 1990s.

Poverty as a Relative Concept In most complex societies throughout human history, the vast majority of people were propertyless. The existence of sharp disparities between a small elite class comprised of wealthy property holders and a huge propertyless underclass was so common a feature of most complex societies that poverty was simply taken for granted and perceived to be inevitable. This perception was reinforced by the Bible: “For ye have the poor always with you” (Matthew 26:11) and “The Poor shall never cease out of the land” (Deuteronomy 15:11).

In modern American society, however, the most affluent in human history, the existence of poverty appears as an anomaly, a glaring contradiction and one that has been the subject of considerable debate (Murray, 1984; Harrington, 1984; Sandefur and Tienda, 1988; Jencks and Peterson, 1991). Obviously, poverty is a relative concept. Many people would argue that the lives of extremely poor people in rural Mississippi or in New York City are considerably better than those of impoverished families in Calcutta, India, who are forced to live, eat, sleep, and die on the streets.

Similarly, poor families in the United States live better lives than most families did in pre-industrial times. Poverty defined However, we do not live hundreds of years ago or in Calcutta today. Americans live in a society that takes for granted many gains in the quality and security of life. We find it intolerable that people should live on the streets or die at an early age of minor ailments (as they did in pre-industrial times). Nevertheless, even the United States today, the poor suffer from hunger, inadequate shelter, and premature death.

The most widely used definition of poverty in the United States is base on the idea of income sufficiency, the amount of money needed to purchase the basic necessities of life. Although several standards might be used to determine what level of income is sufficient, the measure used by the Social Security Administration has become the official government index of poverty. The poverty index utilizes the U. S. Department of Agriculture estimates of the cost of a minimal food budget, adjusted to the size of the family.

The per person daily food budget is multiplied by three to determine the approximate level of funds needed for all other living costs: housing, clothes, medical care, heat, electricity, and other necessities. Therefore, in 1991 the index classified as poor all families of four with an income of less than $13,924 (U. S. Bureau of the Census, 1992e, p. vii). By this measure, 35. 7 million Americans, 14. 2 percent of the population, lived below the poverty level in 1991. Who are America’s poor? Many Americans think of them as the “dregs” of society, it’s most disreputable member.

The poor are often visualized as skid-row minos, “bag ladies,” able-bodied adults who prefer welfare to working, and so on. However, the reality is that the poor do not fit our stereotypes so clearly. For one thing, there are large numbers of working poor, people who earn so little from their work that their income is below the poverty level. As noted previously, 14. 4 million full-time workers received wages that were insufficient to lift a family of four from poverty (U. S. Bureau of the Census, 1992i). Recent data from the U. S. Bureau of the Census (1992e) for 1991 indicate these characteristics of the poor:

• African-American poverty is nearly three times as common as white poverty, and the poverty rate for Hispanics is nearly three times that for whites. However, two-thirds (67 percent) of the poor are white. • Many poor people live in two-parent families. However, one striking trend in the United States has been feminization of poverty, the increasing percentage of impoverished families that are headed by women. More than half (54 percent) of families in poverty were headed by women. • Of the 35. 7 million poor Americans, 40 percent (14. 3 million) were children

under 18 years of age; of those poor 16 to 24 years of age, more than 40 percent were students. • More than half (53. 2 percent) of poor adults were high school graduates and about one-sixth (18. 7 percent) had completed one or more years of college. • About 11 percent of the poor (3. 8 million) were aged 65 and older. • Of those poor over 16 years of age, nearly one-fifth (19 percent) were disabled. • More than one-fourth (27 percent) of the population living below the poverty level received no governmental assistance whatsoever; less than half of the poor received public assistance payments.

This profile of poverty in the United States shows that the stereotypical portrait of the poor is overly simplistic. First, many of those living in poverty are doing so because of economic conditions beyond their control. For example, thousands of blue-collar workers in “smokestack” industries have lost their jobs as manufacturing plants have shut down or moved; thousands of family farmers, caught between rising production costs and falling prices for their products, have been forced into bankruptcy. Second, nearly 40 percent of those living in poverty are working or seeking more stable work.

Third, many of those included in the categories discussed above – children under 18, some people over 65, the handicapped or disabled – are unable to work. Finally, the poverty category contains a disproportionate number of single mothers. Therefore, whereas some people are poor because employment is not available or because their employment does not pay a living wage, a great many poor people are unemployable under existing conditions rather than unemployed. The vast majority of the poor did not create their condition of poverty and are virtually powerless to change it on their own.

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