This is a really solid introduction to income inequality, how it’s measured, how it’s changing, and whether it matters:
How do you measure inequality?Inequality can be defined or measured in a number of different ways.
One traditional approach was to compare the income of a relatively broad swath of affluent people — the top ten percent of the income distribution (the top decile) or the top twenty percent (the top quintile) — to the national median or average. One big advantage of this approach is that the relevant data is readily available from the Census Bureau and other survey-based sources. A major downside is that this method doesn’t tell you much of anything about the earnings of the very highest earners — people in the top 1 percent, for example.
A newer line of research pioneered by Emmanuel Saez, Thomas Piketty, and their collaborators at the World Top Incomes Database has been to use tax records to focus on the incomes of the very top of the distribution. That lets you understand the top 1 percent, the top 0.1 percent, and even the top 0.001 percent. This work has been the basis of much subsequent discussion about the 99 percent versus the 1 percent but the even finer slices are interesting, too.
It is also at times interesting to look at the gap between the poor (say the bottom 10 percent) and the median household. Metrics that define poverty in relative terms tend to, in effect, look at this kind of inequality. So discussions of the living standards of the poor are normally framed in terms of poverty rather than inequality.
Last but by no means least, there is a widely used summary method of calculating inequality that is known as the gini coefficient. A gini coefficient of 0 corresponds to precise equality while a gini coefficient of 1 corresponds to a state of total inequality.