Thursday, March 29, 2012

Dissecting U.S. Inequality in International Perspective

We all know that the United States has the highest level of income inequality of any high-income country. Right? But at least according to OECD statistics, this claim is only true if one looks at inequality after taxes and transfers. If one looks at inequality before income and taxes, the U.S. economy has less inequality than  Germany, Italy, and the United Kingdom, and about the same amount of inequality as France. The OECD data also offers a hint as to why this unexpected (to me, at least) outcome occurs.

Start with the OECD numbers. The OECD uses the Gini coefficient to measure income inequality across high income. For an earlier post with an intuitive explanation and definition of the Gini coefficients, see here. For present purposes, it suffices to say that a Gini coefficient is a way of measuring inequality that theoretically can range from a score of zero for perfect equality, where everyone has exactly the same income, to a score of one for a situation of complete inequality, where one person receives all the income.

Here's a compilation of Gini coefficients from OECD data  with the United States in the top row, followed by Canada, France, Germany, Italy, Japan, Sweden, and the United Kingdom. The OECD data for the second column is here, and data for the other columns is available by toggling the "Income and population measures" box at the top. All data is for the latest year available.  (Thanks to Danlu Hu for putting together the table.)

As noted above, the U.S. has the highest Gini coefficient of these eight comparison countries if measured after taxes and transfers (second column), but not if measured before taxes and transfers (first column). However, a hint as to why this arises can be found in the last four columns, which break down the Gini coefficients by the working age population and the over-65 population.

When it comes to the working age population, before taxes and transfers, the U.S. level of inequality is third-highest, but virtually tied for first with the United Kingdom and Italy. After taxes and transfers, the U.S. level of inequality among the working age population clearly the highest.

When it comes to the over-65 population, before taxes and transfers, the U.S. has a far more equal distribution of income than France, Germany, and Italy. I haven't dug down into the data here, but I suspect that these numbers are reflecting that a much larger share of over-65 workers are still in the labor force in the U.S. economy--which makes the distribution more equal before taxes and transfers.

Taxes and transfers make the over-65 distribution of income far more equal in all eight countries, but the U.S. stands out as by far the least equal, followed by Japan, with both well behind the other six countries.

These patterns are consistent with a finding from an OECD report published last fall called  Divided We Stand: Why Inequality Keeps Rising.  I blogged about it on December 16, 2012, in "Government Redistribution : International Comparisons." One theme of the report is that the extent of government redistribution across populations is driven much more by the widespread provision of government benefits than by the progressivity of taxation. As the OECD report stated: "Benefits had a much stronger impact on inequality than the other main instruments of cash distribution -- social contributions or taxes. ... The most important benefit-related determining factor in overall distribution, however, was not benefit levels but the number of people entitled to transfers."