Analysis: Cross-National Comparisons–Shining a Light on Income Inequality

In this brief prepared for the Social Science Research Council, Janet Gornick and Nathaniel Johnson explore variation across countries and over time in levels of income inequality and in the size of the middle class. They also address the causes and consequences of high and rising inequality.

Excerpt:

We began our research by assessing income inequality at approximately 2016. We assess inequality using two income definitions. The first is household income after taxes and transfers are taken into account, referred to as “disposable household income” (or DHI). DHI includes income from the labor market and from capital, plus private and public income transfers, minus income taxes paid (including social contributions, such as FICA in the United States). This amount is reported by survey respondents. The second definition is household income before taxes and transfers are captured. This amount—widely referred to as “market income”—is calculated by us, mechanically, by subtracting income transfers received and adding taxes paid back in. (Going forward, we use the terms “DHI” and “market income”).

In addition, we implemented some standard methodological practices. For both types of income, we adjust for household size. We limit our analyses to nonelderly households,4 to avoid mixing households that blend market income and transfers with those that rely primarily on the latter. Finally, inequality is measured by the widely used Gini coefficient, in which a higher value represents a more unequal distribution.

We present our first contemporary snapshot in Figure 1. Inequality of DHI, across households, is reported in the dark blue bars, and inequality of market income in the light blue bars. Looking at inequality of DHI, we see that the highest level of income inequality is reported in the United States (at .38), and the lowest level is reported in three Nordic countries, Finland, Norway, and Denmark (all with much lower inequality, at .25). When we turn to inequality of market income—which is substantially higher everywhere—a fairly similar story emerges. The United States again reports the highest level of inequality, now tied with the United Kingdom; however, some other countries shift rank, and the Nordic countries no longer stand out as exceptionally egalitarian.

A key benefit of this analytic framework is that it allows us to consider the extent to which states redistribute income via taxation and income transfers. It is common in this field to consider the difference between these two inequality indicators as a proxy for redistribution—and we followed suit. Two of our study countries reduced inequality by as much as 14–15 Gini points (Finland and Denmark), whereas five countries reduced inequality by as little as 9–10 Gini points (Canada, Italy, Israel, Spain, and the United States)—and this latter group started with higher levels of market-income inequality. Through this lens, we can see why inequality of DHI—inequality in the income that households have “at the end of the day”—is so high in the United States. Market income inequality—i.e., inequality generated, mainly, from the labor market—is high, and redistribution is modest, bordering on meager.

In our next analysis, we look at changes—using these same two measures—in the last three decades (see Figure 2). Again, we do not always have data for our defining year, 1985; data from some of these 15 countries are from 1986 or 1987. Note that, here, we report results for only 10 of our 15 countries; in five countries, we lack full information on market income at the earlier time point.

Read the entire brief Income Inequality in Rich Countries: Examining Changes in Economic Disparities on the SSRC website, where it has been published as part of the Items series.  Items is digital forum for insights from the social sciences.

Related Commentary: The U.S. Middle Class Isn’t Shrinking, But It Is Getting Squeezed as Inequality Rises