There’s been a lot of discussion in recent years on the issue of “income inequality,” especially concerns about “increasing income inequality” (557,000 search results for that term on Google) and “rising income inequality” (973,000 Google search results). A recent article in The Atlantic referred to America’s “income inequality crisis.” There’s apparently not as much attention on “explaining income inequality” (only 43,300 Google search results), a topic that this post attempts 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 instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households?
The chart above (click to enlarge) shows some key demographic characteristics of U.S. households by income quintiles for 2011, using updated data from the Census Bureau (here, here and here, and see my previous versions of this analysis for years 2009 and 2010).
Below is a summary of some of the key demographic differences between American households in different income quintiles in 2011:
1. Mean number of earners per household. On average, there are significantly more income earners per household in the top income quintile households (2.03) than earners per household in the lowest-income households (0.44). 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 U.S. households is the number of earners per household.
2. Share of households with no earners. Almost 62 percent of U.S. households in the bottom fifth of Americans by income had no earners for the entire year in 2011. In contrast, fewer than 3 percent of the households in the top fifth had no earners in 2011, 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 (78.2 percent) than for the bottom income quintile (16.7 percent), and single-parent or single households represented a much greater share of the bottom 20 percent of households (83.3 percent) than for the top 20 percent (21.8 percent). Like for the average number of earners per household, the share of married-couple households also increases for each higher income quintile.
4. Age of householders. Roughly 3 out of 4 households (73.7percent) in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to only 44.3 percent of household members in the bottom fifth who were in that prime earning age group. The share of householders in the prime earning age group of 35-64 year olds increases with each higher income quintile.
Compared to members of the top 20 percent of households by income, household members in the bottom 20 percent were 1.6 times more likely to be in the youngest age group (under 35 years), and almost three times more likely to be in the oldest age group (65 years and over).
6. Work status of householders. More than four times as many top quintile households included at least one adult who was working full-time in 2011 (78.2 percent) compared to the bottom income quintile (only 18.5 percent), and more than five times as many households in the bottom quintile included adults who did not work at all (67.7 percent) compared to top quintile households whose family members did not work (12.9 percent). The share of householders working full-time increases at each higher income quintile.
7. Education of householders. Family members of households in the top fifth by income were five times more likely to have a college degree (62.3 percent) than members of households in the bottom income quintile (only 12.1 percent). In contrast, householders in the lowest income quintile were 15 times more likely than those in the top income quintile to have less than a high school degree in 2011 (26.9 percent vs. 1.8 percent). 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, which means that individuals and households are not destined to remain in a single income quintile forever. Fortunately, evidence shows that individuals and households move up and down the income quintiles over their lifetimes as the key demographic variables highlighted above change.
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 in 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 reports 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 change over a person’s life, so does income mobility.
Update: See some related commentary from Atlanta Journal-Constitution columnist Kyle Wingfield.