What is Income Inequality?

Income Inequality describes differences in income between families or households, a typical and necessary trait of any market economy, with those that enjoy a higher level of education, more capital, or receive higher incomes. Income inequality is usually measured using what economists call the Gini Coefficient, which is calculated by looking at what percent of income a certain percentage of the population receives, e.g. the wealthiest 50% of the population receiving 70% of the overall income. If everyone received the same income, the Gini Coeffcient would be 0; and, if all income was received by one person it would be 1.

Why is Income Inequality Important?

Income inequality is critically important for measuring social well-being for several reasons. For one, income disparity has been found in economic research that those with a low income will profit more from the same increase in income than the already wealthy. This means that it makes a difference who receives the additional income when Gross State Product grows. Additionally, if inequality becomes too extreme, it endangers the social cohesion of a state, leading to such a large gap between groups of people that some feel left behind. While it is part of a market economy that incomes are different, there still needs to be a fair chance for every Marylander to prosper.

How has Income Inequality Changed Over the Years?

Income inequality on both the State and the national level increased since the late 1960s. Incomes in Maryland are somewhat less unequal than in the United States as a whole. From its lowest point at 0.349 the Gini Coefficient has risen to 0.442. This is confirmed by the observation that wages have remained largely constant even in times of economic growth, shifting income to the top.

Methodology & Data Sources

Between 1992 and 1993 a change in the data collection methodology took place, reducing comparability. For the Census years before 1979 only family data was collected, not household data. However these two become very close proxies in earlier years where most households were families and can therefore be substituted with reasonable accuracy.

There is a surprisingly high difference between the numbers for 2006 and 2007, with the 2006 number lower than the 1989 number. This should be used with some care. Other GPI studies have used a methodology based on Nielsen and Alderson for calculating some Gini coefficients. While this would allow a better estimation of older data, it would be inconsistent with the estimates now provided regularly by the American Community Survey. We therefore used official numbers and extrapolations based on national trends where necessary. Since numbers for 2008 are not available and the effect of the financial crisis on inequality is ambivalent, the 2007 data point was kept for 2008 to avoid distortions. New data will correct this.

Equation

The Gini Coefficient of Maryland; a statistical measure between 0 and 1 of family household income inequality.

Point of Contact

Jim Palma, MDP