A Reflection in Income Inequality

Income inequality is a difficult issue to sort through, in part because how one measures, and what one measures, can lead to different conclusions.

It nevertheless is possible to argue that excessive income inequality is a bad thing, while arguing that some amount of income inequality is a positively good thing (to the extent it encourages people to invest in training, and further to note that some income inequality is justly deserved.

At the same time, one also should note that one reason income equality in some countries, which arguably has increased recently, is caused by "returns to wealth," and not necessarily by excesses on the "executive pay" front, which it might be easy to argue do exist.

The average annual income of the top one percent of the population is $717,000, compared to the average income of the rest of the population, which is around $51,000.It also is fair to note that there is a logarithmic difference. 

The top one percent of the top one percent have incomes of over $27 million. But the real disparity between the classes is not income but net worth. The top one percent are worth about $8.4 million, or 70 times the net worth of "regular folks."

As a simple look at the Dow Jones Industrial Average will suggest, owners of equities should have done very well since the early 1980s. Since dividend income counts as income, that will show up in the income indexes as well. 

Here's the point:  "The richest one percent earn roughly half their income from wages and salaries, a quarter from  self-employment and business income, and the remainder from interest, dividends, capital gains and rent."

About 16 percent of the top one percent in income were in medical professions and eight percent were lawyers.

Some 18 percent of the top one percent in 2005 worked in the financial industry. 

But the ranks of the one percent also include highly paid atheletes and entertainers, as well as the people leading firms that innovate in the Internet ecosystem. The point is that the vague sense that people "did not earn their money" covers a smaller range of people than commonly suspected. 

All that noted, the graph shows why returns to equity have had such an large impact. Equity owners would naturally benefit from the huge run up in equity values, irrespective of any changes in income trends.