- Today, the standard of living for the average American is nearly seven times higher than it was 100 years ago, after adjusting for inflation. ²

- minimum wage-earners comprise the lowest-paid 2 percent of all employees; today's minimum wage worker earns more, in real terms, in a single day than a low-skilled worker earned in an entire six-day workweek at the turn of the century. In other words, today's minimum wage worker earns more in eight hours than a low-skilled worker earned in 70 or more hours a century ago. ³

- Since its initiation in the mid-1960s, U.S. taxpayers have spent $7.9 trillion on federal welfare programs, often with lamentable social side effects.

According to the official Census Bureau distribution of income by quintile for 1997, 3.6 percent of total income went to the lowest quintile, while the top quintile received 49.4 percent. But the Census data have 4 flaws:

The conventional Census income figures are omit many types of cash and non-cash income.

The conventional Census figures do not take into account the equalizing effects of taxation.

The Census quintiles actually contain unequal numbers of persons, a fact that greatly magnifies the apparent level of economic inequality.

Differences in work effort are not acknowledged in Census publications.

Adding a More Complete Count of Income and Taxes. The conventional money income figures presented in exclude many types of income and compensation received by families and individuals, as well as the effects of taxes in reducing income. Stage 2 corrects for these omissions by making the following adjustments.

--Robert Rector is Senior Research Fellow at The Heritage Foundation. Rea Hederman is a Policy Analyst in the Center for Data Analysis at The Heritage Foundation.

Endnotes

1. David Mulhausen provided valuable assistance in the preparation of this report.

2. Per capita GNP in 1900 was $246. See U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970, Part 1 (Washington, D.C.: U.S. Government Printing Office, 1975), Series F1-5, p. 224. Prices adjusted by the Consumer Price Index (CPI-UX1). See Historical Statistics of the United States, Series E 135, pp. 210, 211, and The Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, February 1999), Table B-62, p. 398.

3. Jacob Riis, writing around 1890, described low-skilled workers earning $1.75 for a six-day week. After adjusting for inflation, this comes today to about $31.50 per week, or $5.25 per day; the typical workday would have been at least 12 hours. Minimum wage workers today earn $5.15 per hour, or $41.20 for an eight-hour day. See Jacob A. Riis, How the Other Half Lives (New York: Dover, 1971), p. 184. How the Other Half Lives was first published in 1890.

4. Nicholas Lehman, The Promised Land: The Great Migration and How It Changed America (New York: Alfred A. Knopf, 1991), p. 131.

5. The authors used data from the Current Population Survey, March 1998, Annual Demographic File, CD-ROM version.

6. The Census Bureau does publish income distribution data based on expanded definitions of income in technical tables in some publications; however, these tables, which offer 17 alternative definitions of income, are bewildering even to professionals in the field. In its texts describing inequality, and in the briefing materials given to the media, the Census Bureau continues to promote the conventional figures shown in Stage 1 of this report.

7. For information on adjustments made to compensate for the top coding of capital gains, see the Methodological Appendix.

8. The values of school lunch and public housing subsidies represent the net government expenditure or subsidy to the individual.

9. The insurance value of Medicaid and Medicare (also called the market value) equals the average net government outlay for persons of a specific risk class within a given state. The risk classes used are elderly, disabled persons, non-disabled adult, and non-disabled child. Under this approach, the value of Medicaid or Medicare equals the average cost to the government of medical services provided to a given class of persons; it does not report specific medical expenditures for particular individuals.

10. However, the top-coded adjustments to capital gains are taken from IRS data, as noted in the Methodological Appendix.

11. The reason for this is that Census counts "households" rather than people, but households in the bottom "quintile" are small and have few people or adult earners in them, while households in the top of the income distribution scale have many more people in them. This is discussed more fully in the section entitled "Detailed Analysis: Population and Income Distribution."

12. To make this adjustment, the rank order of households by income was left unchanged, but the income boundaries of the quintiles were shifted until an equal number of persons fell within each quintile. For example, in order for the bottom quintile to contain 20 percent of the population, the upper-income threshold of the quintile was shifted upward from $18,985 to $23,124. Expanding the income boundary resulted in more persons being included within the quintile.

13. It is important to recognize the difference between the corrections in Stage 2 and Stage 3 and the hypothetical adjustment in Stage 4. Stages 2 and 3 are intended to clarify the real distribution of income in the United States by correcting for omitted income and taxes and the misallocation of population between the quintiles. These corrections provide a clearer picture of the distribution of income as it really exists. By contrast, Stage 4 is intended to demonstrate the effects of the imbalance of work on income distribution. This is accomplished by hypothetical adjustment showing the effects on income within a quintile if work hours were more nearly equalized. This is a hypothetical adjustment only; it shows what the distribution of income would be if work were equalized between quintiles. It does not contend that, in reality, work is so equalized.

14. In Stage 4, we have adjusted only the amount of earnings in each quintile, but we continue to count all of the non-welfare income, including interest, dividends, pensions, and welfare, as before.

15. Even with this labor adjustment, the amount of work performed in the top and bottom quintiles will not be exactly equal since the top quintile (even after the Stage 3 demographic adjustment) still contains 20 percent more working age adults than the bottom quintile.

16. See D. T. Slesnick, "Gaining Ground: Poverty in the Postwar United States," Journal of Political Economy, Vol. 101, No. 1 (1993), pp. 1-38.

17. The undercount of income in the CPS results from both the underreporting of the types of income included in the Census definition of money income and the exclusion of other important sources of income from the money income definition. For a more detailed discussion of CPS underreporting, see Robert Rector, Kirk Johnson, and Sarah Youssef, "The Extent of Material Hardship and Poverty in the United States," Review of Social Economy, September 1999.

18. The "Comprehensive Post-Tax Income" figures of Stage 2 are the same as the Census Bureau's income definition 14, except that Census employs a "fungible method" for valuing Medicaid and Medicare. The fungible method begins with the insurance value of benefits and then arbitrarily reduces the value of benefits received by lower-income persons. This technique, which assigns one value to benefits received by the middle class and a reduced value to the same benefits received by lower-income persons, is obviously inappropriate for the measure of income distribution.

19. It can be argued reasonably that larger multi-person households have certain economies of scale that are not available to single-person or smaller households. It is cheaper for two persons to live together than to live separately. Thus, a married couple living together with an income of $40,000 might be said to have a higher standard of living than two individuals living separately with incomes of $20,000 each. However, the economies of scale of larger households do not justify giving the persons living in such households lower weight or importance in measuring income distribution, as is done with the Census quintile allocation. If the goal is not to measure income per se, but rather to measure the consumer utility derived from income, then making allowance for the economies of scale implicit in larger families is reasonable. The best procedure for doing this would be to adjust family income by an economy of scale factor. This can be done, for example, by dividing the family income by the official poverty income thresholds. (The thresholds are themselves adjusted to take account of economies of scale in large households.) Ranking households by the ratio of comprehensive post-tax income to the appropriate poverty threshold for the family produces distribution of income figures that are considerably more equal than the official Census figures but less equal than the data from Stage 3 of our analysis. The ratio of income in the top to bottom quintiles is $7.31 to $1.00. Additional data on this are available upon request from the authors.

20. For a brief review of new research on marriage and income inequality, see "Poor and Single," The Economist, January 16, 1999.

21. Robert I. Lerman, "The Impact of the Changing US Family Structure on Child Poverty and Income Inequality," Economica, May 1996, pp. S119-S139.

22. U.S. Bureau of the Census, "Money Income in the United States: 1997 (With Separate Data on Valuation of Noncash Benefits)," Current Population Reports, P60-200 (Washington, D.C.: U.S. Government Printing Office, 1998), p. 49.