Here's an easy way to look at income distribution and how it has changed over the years. Let's pretend America has 100 people in it and that the total income for all of America is $100. If everyone made the same per year, everyone would get $1.00 each.
Obviously no free market society operates that way. Instead, there is variability in talent and capability, and some people are able to perform some very important jobs better than others. Those talented people are hired at a premium, and thus they make more than others. That gives us an income distribution, with some people making more money than others. In our example, some people are going to get more than a dollar and some will get less. That's reality.
So how has the income distribution changed in our society since 1979? I've been going through the latest data from the CBO and have come up with a couple of figs to describe this.
First a little about "binning". A data set is best illustrated when you put them into categories, or bins. The CBO has made five bins, called quintiles. Thus, the bottom 20% is the lowest quintile, the people who accrue on average between 20% and 40% the total share of income per year are in the second quintile, and so on. The problem with binning is that you lose resolution. The CBO only chose 5 bins, and therefore it is impossible to say what is happening within a given bin (except for the highest quintile; more on that later).
Below is a figure that illustrates how income would be distributed to the various quintiles if our economy were $100 large and the US had a population of 100 households. The value at any given point is the average amount of $100 dollars each person receives per bin.
Thus, in 1979 each of the twenty people in the lowest quintile received $0.26, and each of the twenty people in the highest quintile received $2.21. As you can see, though, that the amount of the pie each group gets per year has changed over time. The top 20% has expanded it slice of the pie, while the bottom 80% has gotten a smaller and smaller piece of the pie. For example, in 2005 the twenty people in the lowest quintile received only $0.19 each, and each of the twenty people in the highest quintile received $2.73. In other words, the top twenty people get $54 of the $100 and leave $46 for the rest of the 80 people. The change over time can be illustrated as a % change distribution of the $100.
This figure shows that the piece of the pie given to the wealthiest people in the US has grown by 23% over the last 26 years. The piece of the pie given to the bottom 80% has decreased since then, as much as 28% for the bottom 20 people. The percentages don't add up because this is how each piece of the pie has changed over time. The bottom has a small piece to begin with; thus, a small decrease for them is actually quite big, relatively speaking.
The CBO also provides data for income distribution for within the highest percentile. The break the data down by Top 10%, Top 5%, and Top 1%. I showed you above that, on average, each of the top 20 get $2.73. But what if you break the top 20 into categories themselves? How does the $100 breakdown after that? Glad you asked...
Remember, this fig represents how much each person in each group receives out of $100. Unlike above, when we were just looking at quintiles, not all the groups are the same size. The Top 1% has only 1 person, the Top 5% -1% has 4 people, and so on till we get to the quintiles where there are 20 people per group.
As you can see, the distribution of the $54 to the top 20 people is actually highly skewed as well. In fact, it is so skewed I had to magnify the y-axis in order to make room for all the other data points for the bottom 95%. This is because the share of the $100 the top 1%, which in our example is one household, is so much greater than everyone else. That one person received $8.73 of the $100 dollars in 1979; in 2005 that one person got $18.39. How has the percentages changed over time? Each of the 4 people in the Top 5% -1% group received $2.71 in 1979 and $3.18 in 2005, on average.
The only group that hasn't changed much is the people ranked from 5 to 10 since 1979. The bottom 90 people have gotten a smaller piece of the pie over time. The #1 person has more than doubled his take. The only people to significantly increase their share of the $100 over time is the top 5 people.
So how did we get to this situation? More on that later...