Income Inequality: Just the Facts

Let's start by saying there will be lots of opinions about income disparity in America and what, if anything, it means. What I'm offering up below comes from Richard Wilkinson -- a retired professor of Social Epidemiology at the University of Nottingham -- and his TED talk given in October 2011.

Given fellow Fool Morgan Housel's recent article about the middle-class mind-set and its role in contentment, I thought it would be interesting to juxtapose Housel's piece against Wilkinson's findings. I don't claim to have any of the answers to these large psycho-socioeconomic questions. In fact, thinking about them ends up making me more confused than anything. But for those who wish to investigate the phenomenon, there are some interesting tidbits to be had.

But first, a quick primer
In short, Housel's piece points out that our desire to always own the best society has to offer has severely detrimental side effects -- most notably, debt. "To the extent that shifting values have spawned the rise in debt, which has in turn contributed to the deterioration of middle-class finances, there's no one to blame but yourself."

Housel points out that in the end, the bigger problem is the propensity of some to keep up with the Joneses: "Why do so many middle-class Americans feel cheated? It's not so much that they've gotten poorer, but that a few have gotten so much richer."

Wilkinson takes a slightly different approach in pointing out that in countries where the rich aren't so much richer, many of these problems seem to fade away.

Income disparity and several measures of health
Taken at face value, the evidence is convincing. Wilkinson took 23 of the world's most economically developed countries, and compared them on myriad measures of health.

For the purposes of brevity, let's look at an index of health and social problems that takes life expectancy, educational attainment, infant mortality, crime, drug use, and mental illness into account.

Source: http://www.equalitytrust.org.uk/resources/slides.

At first blush, a country's per capita income seems to have little effect on the overall social health of its populace. The average Japanese citizen earns roughly 25% less than the average Norwegian, but enjoys better overall health, as measured by the index.

Wilkinson points out, though, that if we take a look at income disparity among a country's residents, a pattern emerges. He measured disparity by comparing how rich a country's richest 20% were versus the poorest 20%. Here's what that disparity looked like.

Source: http://www.equalitytrust.org.uk/resources/slides.

Whereas the highest quintile in Japan earns just over three times more than the lowest quintile, the super-rich of Singapore are about 10 times richer than the lowest quintile in that country. If we take this information, and plot it against the social health index, the results are telling.

Source: http://www.equalitytrust.org.uk/resources/slides.

Though the correlation isn't perfect, it's clear that -- by these measures -- as disparity between people grows, social health deteriorates.

To prove his point, Wilkinson also introduced a graphic that American residents could better relate to. Using the same measure of income disparity, he plotted how trust deteriorates in individual states when income disparity is high.

Source: http://www.equalitytrust.org.uk/resources/slides.

Again, the pattern isn't perfect: Though there's greater disparity in the state of New York, its residents are far more trusting of one another than Mississippians. By and large, though, the more equal income levels are, the more trusting members of each state are.

Can we conclude anything?
I'll wrap it up by saying this: There's nothing that can be concluded with 100% certainty.

It stands to reason that it's easier not to worry about keeping up with the Joneses when people have much the same material wealth. But at the same time, there's no reason why anyone has to attempt to keep up with the Joneses -- that's a choice, whether conscious or not.

In fact, there are plenty of examples of groups of people who choose to define their own standards (i.e., the Amish) rather than succumbing to what society deems relevant.

If I were to go down the wormhole of drawing conclusions, I would have one: Community is important. A look at the countries (Japan, Sweden, Norway) and states (North Dakota, Minnesota, Montana) that have the highest levels of social health and trust shows us this.

With the exception of urban Japan, these locations represent states and countries that are not too densely populated and where survival -- whether financial or social (who wants to be bored?) -- is dependent on interconnectedness.

It's a lot easier to support one another -- and to know you'll be judged more on your character than the size of your house -- when you know the people living around you than it is when every face you see walking down the street is completely alien to you.

But that's just my opinion. What's yours? Sound off, with respect, below.

Fool contributor Brian Stoffel is glad to see his native Wisconsin on the upper end of trust. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (9) | Recommend This Article (40)

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  • Report this Comment On August 30, 2012, at 1:30 AM, gcp3rd wrote:

    Clearly if we are to believe the stats in the graph showing the difference in wealth between the richest and poorest quintiles of people there is a larger gap in America. However, my perception is that many, if not most, people in the US have mediocre to poor money management skills. I was one of them. I recently paid off all long-term credit card debt. Debt that begin 12 years ago. But when I look around I see most of my friends enjoying newer cars, kitchen gadgets, TVs, computers and homes than my wife and I do. We are not poor but just really don't need those things. And we would like to achieve financial freedom - the situation where your finances allow you to spend all your time just how you want. I'll take that over spending all my money. Most people go for the instant gratification - and admittedly that's good for my stocks.

  • Report this Comment On August 30, 2012, at 6:34 PM, TMFBreakerRob wrote:

    I think you left out a very important data point on the "Index of problems" vs "wealth disparity" graph. Singapore has even more disparity than the US, yet I would think it has a lower index than almost any country.

    If so, one could compare Singapore and the US and argue that there are other factors more important to social ills than income disparity.

  • Report this Comment On August 30, 2012, at 6:52 PM, ETFsRule wrote:

    "If so, one could compare Singapore and the US and argue that there are other factors more important to social ills than income disparity."

    One would be incorrect if they made this argument.

    Comparing many different countries (and US states) to one another, as was done here, is much more statistically meaningful than comparing the US to only one other country, as you have suggested doing.

  • Report this Comment On August 31, 2012, at 4:40 PM, iksrog wrote:

    We still have to see what the full effect of Euro-Socialism will bring as well as the massive debt burden in the US.

    If and when the social fabric is ripped, as we are starting to see in Greece and Spain, then let's follow up on the graphing.

    I will bet that not only will wealth separate further but unrest and social upheaval will come into play when the social safety nets are cut significantly or eliminated in the name of fiscal survival.

    The northern European states will only slightly change, but I would expect the southern states to move up the curve dramatically.

    The US? We still have time to correct, but I do not hold much hope in the future. I pray I am wrong.

  • Report this Comment On August 31, 2012, at 5:06 PM, vebb wrote:

    We as Westerners might want to consider this: Westerners live in the material world find fullfilment there. Eastern philosophies concentrate on spiritual fulfillment and their contentment is often found there.

    I do not envy my friends and neighbors if they have more, I would pursue those things if I were so motivated. I invest ,save, share and spend when I wish , but I find serenity in odd places and spend much less these days. Peace to you all.

  • Report this Comment On August 31, 2012, at 5:49 PM, mjmine wrote:

    income disparity are the operating words. If one can't make enough to live on and have access to decent medical care we aren't living in a civilized society. It would follow then that there would be social unrest from the people for whom this is a problem. The real problem is people thinking that all this is because people want phones and TVs. Just take a look at Maslow's hierarchy of needs that describes the problems and the solutions.

  • Report this Comment On August 31, 2012, at 6:01 PM, ledgeuno wrote:

    Interesting piece, although I'm curious to see exactly how the index of social health and the measure of trust were derived.

    Anyway, given that this is an investing web site, I suppose that the big question is: if people start valuing community more, and material well-being/consumption less, what would be the implications for one's investment strategy?

  • Report this Comment On August 31, 2012, at 11:14 PM, maiday2000 wrote:

    Correlation is not causation.

    If you look at the last graph about trust index, one could just as easily put racial homogeneity on the x-axis and the correlation would look the same. Even the countries and states compared at the end of the article are very racially homogenous. To state that income disparity is the sole cause of distrust is ridiculously simplistic.

    I recall a study from a few years ago by Robert Putnam that showed the trust index in racially homogenous neighborhoods is much higher than in those that are highly diverse (even among people of the same race in diverse neighborhoods). This was irrespective of the income in the neighborhood.

    I am not saying diversity is bad, but there are a lot more things that go into trust than the disparity in how much money people make. Values and culture anyone???

  • Report this Comment On September 02, 2012, at 2:19 PM, notjustmoney wrote:

    It's a given that correlations never prove causes. Nonetheless the near power-law distribution in the second scatter-gram is compelling. I'd throw anger into the mix. Income inequality isn't just about poor spending decisions. People being laid off while execs are rewarded for cost-cutting can trigger irate responses that affect our social health, including our relative trust of others.

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