Income Inequality and Stratification: Same Thing?
Jim Blair

Income mobility is key

I have read several articles and posts pointing out that the USA has a much wider range of incomes (and of wealth) than is found in Europe. This is usually reported with the implication that it is a bad thing, and one newspaper article referred to this as "stratification". It is not. And it may be a good thing: that depends on an independent parameter, Income Mobility.

Who wants total equality?

I agree that a stratified society is bad, and any reasonable person will realize that some inequality is necessary, and so is good. I mean, if the average income is $20,000 this year, would you want a law that next year everyone will have exactly $20,000 dollars? Any income over this will be taxed 100% and anyone with less will be given the difference. Isn't it obvious that this would be insane? (And would you work at all next year if this were? the law?)

Is inequality the same as stratification?

Since this concept has been so mis-understood, I offer a hypothetical example to illustrate. Imagine two societies: E and A. Both have a distribution of incomes which is approximately Gaussian (Bell Curve).

(I will deal with income rather than wealth; they are not the same, but total wealth figures are less accurately measured and (I think) less meaningful. They include stock holdings and money tied up in investments and not immediately available to spend. The interest/dividend from this is counted as income. Income is positive, but wealth (assets - liabilities) may be negative. If you consider total assets, most of the "richest" people in the US are women. Old women. ---an aside. Back to the main thought.)

In E (Europe?) and A (USA?) the economists will divide the population into 5 income levels (for any given year). In E the top 20% have (on average) say 3 times the income of the bottom 20%.

But in A the top 20% have 10 times the average income of the bottom 20%. A has more inequality than E. But, let us say, in E, ten years later the same people are in the top and the bottom and the various middle fifths, except for those who died, and they are replaced by their children.

But in A many different people are in each of the 5 categories. In E, you are born into a level of society and live there, and die there. And there are few immigrants. E is a class society. But in A, there are immigrants, most of them as well as people just out of school are poor (in the bottom income level). But 10 years later, many of the people in the bottom level have moved up. In society A, people start at the bottom, but most advance as they age. They move up the ladder during their working life, and then retire, and die. This is not a stratified society. To say that A "should have more equality" is to say that those who start poor should not be permitted to improve their position in life "too much"; they should "know their place".

How can you tell?

How can you tell the difference between E and A? Not from the kind of income data usually reported, since that is based on a given year. But one clue is in the ages of each level. In E, all income levels will have pretty much the same average age. But in A, the "poor" will be much younger than the "rich". And another way will be data tracking the same people for a decade or so. For this kind of data in the US, see my web page for a link to Income Mobility, a table which relates the movement of individual taxpayers over a time interval.

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