Does anyone find it puzzling that measures of income inequality in the U.S. generally begin around 1968, the year college-educated baby boomers began to enter the workforce? Let’s put the pieces together. Piece one: income distribution is measured without regard to the age of those being measured. Piece two: the older one is, the greater their earnings are likely to be.
Income distribution is measured by income level (in quintiles). It is possible that a 60 year-old resides in the lowest income quintile and a 20 year-old in the highest. However, since income level is strongly related to age, it is likely that the highest quintile includes a greater concentration of older people, and the lowest, younger people. So far, so good.
The “twist” comes when we try to measure changes in the distribution over time. If an extra large proportion of the lowest quintile in 1968 consists of twenty-something college students, as those students age and their incomes grow, they will distort the income levels in each quintile they populate. As we view income distribution today, we are witness to a significant income “bump” moving through the quintiles since 1968, making it appear that income is being concentrated in the upper quintiles.
To see how the math works, imagine there are two age cohorts in society, ages 18-37 (Cohort A) and ages 38-57 (Cohort B). All those in each cohort earn $50,000 per year. Cohort A has 200 members, and Cohort B, 100. Income distribution in this society is concentrated in Cohort A, since it has twice the income of Cohort B, and yet each member of society earns the same $50,000 per year. In the future, the population of Cohort B will increase to 200, and that of Cohort A will shrink to 100. At this point, income will be said to be concentrated in Cohort B, while all members of society are still earning the same $50,000.
Many factors influence the conclusions we should draw from measuring income distribution. This is one that has not received much notice, but is likely to have a significant effect. Don’t stand for the unquestioning acceptance of growing income inequality by press and pundits. It is just not as simple as they want to make it.