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.


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.


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.


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.


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.

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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.

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