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Volume 14
Issue 1
Spring 2010

©2005 iStockphoto; Eliza Snow

A n E c o n o m i c E d u c at i o n Ne w s l e t t e r f r o m t h e Fe d e r a l Re s e r v e B a n k S t. L o u i s

What’s Your
Question?
Income, Education,
Employment
and Poverty

Economic
Snapshot
Education Pays

Bulletin Board
Summer School
at the Fed
Cards, Cars
and Currency

Resources
Economics
and Children’s
Literature

www.stlouisfed.org/education

U.S. Income Inequality:
It’s Not So Bad
Each year, the U.S. Census Bureau releases data on the income levels of
America’s households. A comparison of the annual data over time reveals
that the income of wealthier households has been growing faster than the
income of poorer households—the real income of the wealthiest 5 percent
of households rose by 14 percent between 1996 and 2006, while the income
of the poorest 20 percent of households rose by just 6 percent.
As a result of these differences in income
growth, the income of the wealthiest
5 percent of households grew from 8.1
times that of the income of the poorest
20 percent of households in 1996 to 8.7
times as great by 2006. Such figures commonly lead to the conclusion that income
inequality in the United States has increased.
This apparent increase in income inequality has not escaped the attention of policy
makers and social activists who support
public policies aimed at reducing income
inequality. However, the common measures
of income inequality that are derived from
the census statistics exaggerate the degree
of income inequality in the United States in
several ways. Furthermore, although many
people consider income inequality a social
ill, it is important to understand that income
inequality has many economic benefits and
is the result of—and not a detriment to—a
well-functioning economy.

An Inaccurate Picture
The Census Bureau essentially ranks all
households by household income and then
divides this distribution of households into

quintiles. The highest-ranked household
in each quintile provides the upper income
limit for each quintile. Comparing changes
in these upper income limits over time for
different quintiles reveals that the income
of wealthier households has been growing
faster than the income of poorer households,
thus giving the impression of an increasing
“income gap” or “shrinking middle class.”
One big problem with inferring income
inequality from the census income statistics
is that the census statistics provide only a
snapshot of income distribution in the U.S.,
at a single point in time. The statistics do
not reflect the reality that income for many
households changes over time—i.e., incomes
are mobile. For most people, income
increases over time as they move from
their first, low-paying job in high school to
a better-paying job later in their lives. Also,
some people lose income over time because
of business-cycle contractions, demotions,
career changes, retirement, etc. The implication of changing individual incomes is that
individual households do not remain in the
same income quintiles over time. Thus,
continued on Page 2

T h e f e d e r a l r e s e r v e ba n k o f s t. l o u i s : Ce n t r a l t o A m e r i c a ’ s e c o n o m y ™

Income Inequality
continued from Page 1

comparing different income quintiles over time is
like comparing apples to oranges, because it means
comparing incomes of different people at different
stages in their earnings profile.
The U.S. Treasury released a study in November
2007 that examined income mobility in the U.S. from
1996 to 2005. Using data from individual tax returns,
the study documented the movement of households
along the distribution of real income over the 10-year
period. As shown in Figure 1A, the study found that
nearly 58 percent of the households that were in
the lowest income quintile (the lowest 20 percent)
in 1996 moved to a higher income quintile by 2005.
Similarly, nearly 50 percent of the households in the
second-lowest quintile in 1996 moved to a higher
income quintile by 2005. Even a significant number
of households in the third- and fourth-lowest income
quintiles in 1996 moved to a higher quintile in 2005.
The Treasury study also documented falls in household income between 1996 and 2005. This is most
interesting when considering the richest households.
As shown in Figure 1B, more than 57 percent of the
richest 1 percent of households in 1996 fell out of that
category by 2005. Similarly, more than 45 percent of
the households that ranked in the top 5 percent of
income in 1996 fell out of that category by 2005.
Thus it is clear that over time, a significant number
of households move to higher positions along the
income distribution, and a significant number move
to lower positions along the income distribution.
Common reference to “classes” of people (e.g., the
lowest 20 percent or the richest 10 percent) is quite
misleading because income classes do not contain
the same households and people over time.
Another problem with drawing inferences from the
census statistics is that the statistics do not include
the noncash resources received by lower-income
households—resources transferred to the households—and the tax payments made by wealthier
households to fund these transfers. Lower-income
households annually receive tens of billions of dollars in subsidies for housing, food and medical care.
None of these are considered income by the Census
Bureau. Thus the resources available to lowerincome households are actually greater than is
suggested by the income of those households as
reported in the census data.
At the same time, these noncash payments to
lower-income households are funded with taxpayer
dollars—mostly from wealthier households, since
they pay a majority of overall taxes. One research
report estimates that the share of total income

2

earned by the lowest income quintile increases
roughly 50 percent—whereas the share of total
income earned by the highest income quintile drops
roughly 7 percent—when transfer payments and
taxes are considered.
The census statistics also do not account for the
fact that the households in each quintile contain different numbers of people; it is differences in income
across people, rather than differences in income
by household, that provide a clearer measure of
inequality. Lower-income households tend to consist
of single people with low earnings, whereas higherincome households tend to include married couples
with multiple earners. The fact that lower-income
households have fewer people than higher-income
households skews the income distribution by person.
When considering household size along with transfers received and taxes paid, the income share of the
lowest quintile nearly triples and the income share of
the highest quintile falls by 25 percent.

Is Policy Needed?
Income inequality will still exist even if the income
inequality statistics are adjusted to account for the
aforementioned factors. Given the negative attention
income inequality receives in the media, it is important
to ask whether reducing income inequality is a worthy
goal of public policy. It is important to understand
that income inequality is a byproduct of a well-functioning capitalist economy. Individuals’ earnings are
directly related to their productivity. Wealthy people
are not wealthy because they have more money; it
is because they have greater productivity. Different
incomes reflect different productivity levels.
The unconstrained opportunity for individuals
to create value for society—and the fact that their
income reflects the value they create—encourages
innovation and entrepreneurship. Economic research
has documented a positive correlation between
entrepreneurship/innovation and overall economic
growth. A wary eye should be cast on policies that
aim to shrink the income distribution by redistributing income from the more productive to the less
productive simply for the sake of “fairness.” Redistribution of wealth increases the costs of entrepreneurship and innovation, with the result being lower
overall economic growth for everyone.
Poverty and income inequality are related, but only
the former deserves a policy-based response. Sound
economic policy to reduce poverty would lift people
out of poverty (increase their productivity) while
not reducing the well-being of wealthier individuals.

Glossary

Tools to implement such a policy include investments in education
and job training.
Income inequality should not be vilified, and public policy
should encourage people to move up the income distribution and
not penalize them for having already done so.

Adjusted gross income — Total income less statutory
adjustments.
Business cycle — The periodic but irregular up-and-down
movements in economic activity, measured by fluctuations
in real GDP and other macroeconomic variables.

Thomas Garrett is an assistant vice president and economist at the
Federal Reserve Bank of St. Louis.

Capitalism — Economic system characterized by the following:
ownership of private property; individuals and companies
that are allowed to compete for their own economic gain;
and free-market forces that determine the prices of goods
and services.

1996 Household Income Quintile

Figure 1A. Movement to Higher Income Quintiles 1996-2005

Income — Earnings received as wages, rent, profit or
interest; payments received for providing natural, human
capital and entrepreneurial resources in the market.

Lowest Quintile

Inflation — A sustained increase in the average price level.

Second-Lowest

Poverty — A condition that occurs when people do not
enjoy a certain minimum level of living standards, as
determined by a government.

Third-Lowest

Productivity — A ratio of output to input during a specified period of time. For example, output per worker is
a measure of the productivity of labor during an hour,
week, month or year. The productivity of workers can be
increased through division of labor, investment in human
capital and investment in capital resources.

Fourth-Lowest

0

10

20

30

40

50

60

% In a Higher Quintile by 2005

Purchasing power — A measurement of the relative value
of money in terms of the quality and quantity of goods
and services it can buy.

1996 Income Group

Figure 1B. Movement to Lower Income Group 1996-2005

Quintile — One of five equal parts of a range of data, each being
1/5th (20 percent) of the range.

Top 10%

Real income — Income expressed in terms of the goods and
services it can purchase.

Top 5%

Standard of living — A measure of the goods and services
available to a person in a country; the dollar value is calculated as per capita GDP.

Top 1%

0

10

20

30

40

50

Subsidies — Financial assistance given by the government
to individuals or groups.

60

Taxes — Mandatory government fees on business and individual income, activities or products.

% In a Lower Group by 2005

Taxable income — Adjusted gross income less standardized
or itemized deductions.

Source: Treasury Department
One problem with popular portrayals of the income gap is that they show income distribution at a single point
in time. But for many households, income changes over time. The low-paying jobs from high school days
usually give way to better-paying jobs later in life. Figure 1A shows the percentage of households that moved
to a higher income quintile from 1996 to 2005. For example, nearly 58 percent of the households in the lowest
income quintile in 1996 moved to a higher category by 2005. The reverse also happens, as shown in Figure 1B.
Of those households that were in the top 1 percent in income in 1996, for example, more than
57 percent dropped to a lower income group by 2005.

Transfer payments — Payments by governments—such as
social security, veterans’ benefits and welfare—to people
who do not supply goods, services or labor in exchange
for the payments.
Wealth — Accumulated assets such as money and/or
possessions, often accumulated as a result of saving
and investment.

3

w h a t ’ s y o u r questio n ?

Income, Education, Employment and Poverty
Q. What is the overall education level of the
population in the United States?
A. The educational attainment in the United States
is as follows:
Subject

Total

Population 25 years and over

Q. How does income vary with level of education?
A. There is a direct correlation between income and
level of education.
Median Earnings in the Past 12 Months
(in 2009 Inflation-Adjusted Dollars)
Subject

Total
19,989

Less than 9th grade

6.4%

Less than high school graduate

9th to 12th grade, no diploma

9.1%

High school graduate (includes equivalency) 27,448

High school graduate (includes equivalency)

29.6%

Some college or associate’s degree

33,838

Some college, no degree

20.1%

Bachelor’s degree

47,853

Associate’s degree

7.4%

Graduate or professional degree

63,174

Bachelor’s degree

17.3%

Source: U.S. Census Bureau, 2006-2008 American Community Survey

Graduate or professional degree

10.1%

Percent high school graduate or higher

84.5%

Q. How does the U.S. Census Bureau determine
poverty levels?

Percent bachelor’s degree or higher

27.4%

Source: U.S. Census Bureau, 2006-2008 American Community Survey

Q. How does the level of education correlate
with the poverty rate in the United States?
A. There is an indirect correlation between poverty
and levels of education, as the chart reflects:
Poverty Rate for the Population 25 Years and
Over for Whom Poverty Status is Determined
by Educational Attainment Level
Less than high school graduate

23.6%

High school graduate (includes equivalency)

11.5%

Some college or associate’s degree

7.8%

Bachelor’s degree

4.1%

Graduate or professional degree

3.0%

Source: U.S. Census Bureau, 2006-2008 American Community Survey

A. The Census Bureau uses a set of money income
thresholds that vary by family size and composition to
determine who is in poverty. If a family’s total income
is less than the family’s threshold, then that family
and every individual in it is considered in poverty. The
official poverty thresholds do not vary geographically,
but they are updated for inflation using the Consumer
Price Index (CPI-U). The official poverty definition
uses money income before taxes and does not include
capital gains or noncash benefits (such as public housing, Medicaid and food stamps).
ask.census.gov

Q. What do the data related to taxation over
time tell us regarding tax inequality?
A. From 1986 until 2006, the total income tax share
for the top 1 percent of income earners has consistently risen, from 25.75 percent in 1986 to 39.89
percent in 2006.
www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html#_grp1

Q. What is the average income tax rate?
A. According to the Internal Revenue Service’s latest
statistics for 2006 individual tax returns, the average
tax rate for all taxpayers was 12.60 percent. The average tax rate for the bottom 50 percent income group
was 3.01 percent, and the average tax rate for the
bottom 99 percent income group was 9.72 percent.
www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html#_grp1

4

e c o n o m i c s n apshot

Education Pays
1.

What is the unemployment rate?

Fourth Quarter 2009

The unemployment rate represents the number of
unemployed as a percent of the labor force. People
are classified as unemployed if they are 16 years or
older, do not have a job, have actively looked for
work in the previous four weeks and are currently
available for work. People who were not working
and were waiting to be recalled to a job from which
they had been temporarily laid off are also included
as unemployed.
Source: www.bls.gov/cps/lfcharacteristics.html#unemp

2.

What is the relationship between the unemployment rate and the level of education people have?
The relationship is negative or indirect. The less
education people have, the more likely they are
to be unemployed.

3.

In 2008, what percent of high school dropouts
were unemployed?
9 percent

4. In 2008, what percent of those with bachelor’s
degrees were unemployed?
2.8 percent

Q1-’09

Q2-’09

Growth Rate
Real Gross Domestic Product

–6.4%

–0.7%

2.2%

5.9%*

Inflation Rate
Consumer Price Index

–2.2%

1.9%

3.7%

2.6%

Civilian Unemployment Rate

8.2%

9.3%

9.6%

10.0%

*Second estimate

5.

What is the relationship between level of
education and median income?
The relationship is positive or direct. The more education people have, the higher their median income.

6. Who makes up the labor force?
The labor force includes the employed and unemployed who are 16 years of age or older and who are
not confined to institutions such as nursing homes
and prisons, and who are not on active duty in the
Armed Forces. The remainder—those who have
no job and are not looking for one—are counted as
“not in the labor force.”
Source: www.bls.gov/cps/cps_htgm.hlm#nilf

Unemployment rate in 2008

Median weekly earning in 2008

2.0
1.7

5.1
5.7

$1,561

Doctoral degree

1,531

Professional degree

2.4

Master’s degree

2.8

Bachelor’s degree

3.7

9.0

Q3-’09 Q4-’09

Associate’s degree
Some college,
no degree
High school graduate
Less than a high
school diploma

1,233
1,012
757
699
618
453

Source: Bureau of Labor Statistics, Current Population Survey
Note: Data are 2008 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers. Last modified date: Dec. 22, 2009

5

bulleti n b o a r d

S t. L o u is

L i t t le R o c k

For more information about these programs, contact Barbara
Flowers at 314-444-8421 or barbara.flowers@stls.frb.org.

For more information about these programs, contact Billy
Britt at 501-324-8368 or billy.j.britt@stls.frb.org.

Summer School at the Fed: In the News

Economics and Children’s Literature

June 7-9, 2010: Data and Primary Source Documents

June 15, 2010 | 8:30 a.m. – 3:30 p.m. | Grades K-5
Wilbur Mills Educational Cooperative, Beebe, Ark.

June 10-11 and 15, 2010: Banks: The Rescue, the
Recovery, the Regulation
June 16-18, 2010: Where Have All the Jobs Gone?
Audience: Fifth-grade through high school educators
Credit or non-credit
Credit will be granted through SIUE.
To register: http://stlouisfed.org/event/00BE

Economics and Children’s Literature
July 12, 2010 | 8:00 a.m. – 3:00 p.m.
Audience: K through fifth-grade educators
To register: http://stlouisfed.org/event/00EE

To register: http://stlouisfed.org/event/015E

June 28, 2010 | 8:30 a.m. – 3:30 p.m. | Grades K-5
Southeast Arkansas Educational Cooperative
Monticello, Ark.
To register: http://stlouisfed.org/event/01AE

Cards, Cars and Currency
June 22,2010 | 8:30 a.m. – 3:30 p.m. | Grades 8-12
University of Arkansas | Reynolds Center
Fayetteville, Ark
To register: http://www.stlouisfed.org/event/01FE

Economics and Personal Finance
July 13, 2010 | 8:00 a.m. – 3:00 p.m.

July 13, 2010 | 8:30 a.m. – 3:30 p.m. | Grades 8-12
Arch Ford Educational Cooperative
Plummerville, Ark.

Audience: Middle and high school educators
To register: http://stlouisfed.org/event/00DE

To register: http://www.stlouisfed.org/event/020E

Insights from the Inside

July 21, 2010 | 9:00 a.m. – 4:00 p.m. | Grades 8-12
Federal Reserve Bank of St. Louis—Little Rock Branch
Little Rock, Ark.

July 15, 2010 | 8:00 a.m. – 3:00 p.m.
Audience: Middle and high school educators
To register: http://stlouisfed.org/event/00CE

To register: http://www.stlouisfed.org/event/021E

Insights from the Inside
July 22, 2010 | 9:00 a.m. – 4:00 p.m. | Grades 8-12
Federal Reserve Bank of St. Louis—Little Rock Branch
Little Rock, Ark.
To register: http://stlouisfed.org/event/01BE

6

bulleti n b o a r d

L o u is v ille

M emphis

Bank Contacts
Little Rock
Billy Britt
501-324-8368

For more information about these programs, contact Caryn
Rossiter at 502-568-9257 or caryn.j.rossiter@stls.frb.org.

For more information about these programs, contact Jeannette
Bennett at 901-579-4104 or jeannette.n.bennett@stls.frb.org.

The Great Depression Workshop

Economics and Children’s Literature

March 30, 2010 | 4:30 p.m. – 6:30 p.m.
Bellarmine Center for Economic Education
2120 Newburg Rd., Louisville, Ky.

July 8, 2010 | 8:30 a.m. – 3:30 p.m.
Crowley’s Ridge Educational Cooperative
Harrisburg, Ark.

Audience: High school educators
To register: http://stlouisfed.org/event/010E

Audience: K through fifth-grade educators
To register: http://stlouisfed.org/event/014E

Memphis
Jeannette Bennett
901-579-4104

July 23, 2010 | 8:30 a.m. – 3:30 p.m.
Northeast Arkansas Educational Cooperative
Walnut Ridge, Ark.

St. Louis
Mary Suiter
314-444-4662

Audience: K through fifth-grade educators
To register: http://stlouisfed.org/event/01CE

Barb Flowers
314-444-8421

Audience: High school educators
To register: http://www.stlouisfed.org/event/022E

July 21, 2010 | 8:30 a.m. – 3:30 p.m.
Great Rivers Educational Cooperative, West Helena, Ark.

Scott Wolla
314-444-8624

Insights from the Inside

Audience: K through fifth-grade educators
To register: http://stlouisfed.org/event/01DE

Cards, Cars and Currency
April 22, 2010 | 4:30 p.m. – 6:30 p.m.
Bellarmine Center for Economic Education
2120 Newburg Rd., Louisville, Ky.

June 29, 2010 | 9:00 a.m. – 4:00 p.m. | Grades 8-12
Federal Reserve Bank of St. Louis—Louisville Branch
Louisville, Ky.
Audience: Middle and high school educators
To register: http://stlouisfed.org/event/012E

Economics and Personal Finance
June 23-24, 2010 | 8:30 a.m. – 3:30 p.m.
East Arkansas Community College, Forrest City, Ark.
Audience: High school educators
To register: http://stlouisfed.org/event/016E

June 23, 2010 | 8:30 a.m. – 3:30 p.m.
Northeast Arkansas Educational Cooperative
Walnut Ridge, Ark.
Audience: High school educators
To register: http://stlouisfed.org/event/019E

August 2, 2010 | 8:30 a.m. – 3:30 p.m.
Crowley’s Ridge Educational Cooperative
Harrisburg, Ark.
Audience: High school educators
To register: http://stlouisfed.org/event/018E

Insights from the Inside
Sept. 17, 2010 | 8:30 a.m. – 3:30 p.m
Federal Reserve Bank of St. Louis—Memphis Branch
200 North Main St., Memphis, Tenn. 38103
Audience: Middle and high school educators
To register: http://stlouisfed.org/event/017E

7

Louisville
Caryn Rossiter
502-568-9257

P.O. Box 442
St. Louis, MO 63166

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PAID
ST. LOUIS, MO
PERMIT NO. 444

Inside the Vault is written
by economic education staff
at the Federal Reserve Bank
of St. Louis, P.O. Box 442,
St. Louis, Mo., 63166.
The views expressed are
those of the authors and are
not necessarily those of the
Federal Reserve Bank of
St. Louis or the Federal
Reserve System.

Please let us know what you think about Inside the Vault by taking our online survey
https://misweb.cbi.msstate.edu/pgrimes/InsideTheVault
f e a t u r e d resources

Economics and Children’s Literature Lessons
Economics for the elementary grades

The Federal Reserve Bank of St. Louis offers new online children’s literature lessons written by members of the Federal Reserve economic education staff. Each lesson is
written in an easy-to-follow format that includes a brief description of the lesson, a
listing of the economic concepts to be taught, the appropriate age level, estimated
time required, materials needed, objectives and step-by-step procedures for teaching
the lesson. Additionally, each lesson is correlated with the National Voluntary Content
Standards in Economics and National Standards in Personal Finance. The lessons include
active-learning exercises and are downloadable from the web site. Most lessons include
SMART Board™ applications, which can also be downloaded from the web site.
The lessons can be downloaded at:
www.stlouisfed.org/education_resources/lesson_plans_k-5.cfm
Economic educators at the Federal Reserve Bank of St. Louis offer workshops on
Economics and Children’s Literature. For information contact:
Little Rock: Billy Britt, billy.j.britt@stls.frb.org
Louisville: Caryn Rossiter, caryn.j.rossiter@stls.frb.org
Memphis: Jeannette Bennett, jeannette.n.bennett@stls.frb.org
St. Louis: Barbara Flowers, barbara.flowers@stls.frb.org


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102