Study says income inequality in America even worse than we thought

By David Holmes , written on July 15, 2014

From The News Desk

There is massive income inequality in the United States. It's a fact. There's no disputing that such a gap exists, regardless of your emotional response (or lack thereof) to the fact that the lion's share of wealth in America is concentrated at the top. And the gap is getting bigger.

In the middle of the century, the America's richest ten percent possessed a little above thirty percent of the country's wealth. That share has risen decade-on-decade and is quickly approaching fifty percent. As for the super-rich, the wealthiest one percent, these yacht skippers and Scrooge McDuck types are commonly said to to possess thirty percent of the nation's wealth, according to data repeatedly cited by the U.S. Federal Reserve.

But according to a new working paper from the European Central Bank, that figure may be even higher, sitting somewhere between thirty-five and thirty-seven percent, a not insignificant margin. What explains the discrepancy?

The study's author, economist Philip Vermeulen, says that the commonly-used Federal Reserve figure comes from the Survey of Consumer Finances (SCF), which asks individual households to report their asset holdings. Vermeulen argues that rich people are less likely to respond to these surveys than less rich people, thus skewing income shares among the wealthiest Americans down:

Measuring wealth at the top is always difficult. Household surveys are widely believed to suffer from various degrees of non-response and differential non-response. Sampled households don’t participate in surveys for numerous reasons: absence, lack of time, refusal to reveal sensitive information, etc. When these reasons are correlated with wealth itself serious biases can occur in wealth estimation and the shares of wealth can be biased too. Wealthier households are generally thought to have higher non-response rates. If non-responding households are having higher wealth in some systematic way, wealth estimates will be biased downwards, particularly estimates of wealth at the top of the distribution.
Vermeulen attempts to correct for this by incorporating data from the Forbes World's Billionaires list and employing a power law probability distribution known as the Pareto distribution. This, he believes, helps counteract the non-response bias of the SCF's surveys.

What Vermeulen found was that after using his methodology, income inequality rates for both the top one percent and the top five percent rose for nearly all of the ten countries he studied. Some of the biggest discrepancies could be seen in the Netherlands, where the one percent's wealth share jumped from nine percent to seventeen percent after Vermeulen's methodology was applied, and in Germany, where this number jumped from twenty-six percent to thirty-three percent.

Again, as Vermeulen states, "measuring wealth at the top is always difficult." And this is a "working paper," meaning that it's been released "in preliminary form, to encourage comments and suggestions prior to final publication." But at a time in the U.S. when corporations make record profits, pay some of the lowest effective tax rates in decades, and pass fewer and fewer of those earnings onto employees, even the allegedly biased income inequality figure of thirty percent would be too high. And yet, it may be even more generous than reality.

[illustration by Brad Jonas]