Income inequality decreased for first time since 2007

Income inequality declined in 2022 for the first time since 2007, due primarily to declines in real median household income at middle and top income brackets, according to the latest data from the U.S. Census released last week.

The report shows real median household income dropped 2.3% to $74,580 from 2021 to 2022.

U.S. Census Bureau data from the Current Population Survey Annual Social and Economic Supplement (CPS ASEC) show that the declines in real income at the middle and top of the income distribution resulted in lower income inequality as measured by the Gini index — a common measure of income inequality.

Income inequality refers to how evenly income or income growth is distributed across the population. Higher income inequality represents less equal income distribution or growth.

The report provides several measures of inequality. In this article, we focus on changes in the Gini index and the ratios of income at different percentiles.

The Gini index measures income inequality ranging from 0 to 1 — reflecting the amount that any two incomes differ, on average, relative to mean income.

It is an indicator of how “spread out” incomes are from one another. A value of 0 represents perfect equality, meaning all households had the same amount of income. A value of 1 indicates total inequality, meaning that one household had all the income.

Using pretax money income, the Gini index decreased by 1.2% between 2021 and 2022 (from 0.494 to 0.488). This annual change was the first time the Gini index had decreased since 2007, reversing the 1.2% increase between 2020 and 2021 (Figure 1).

Since 1993 — the earliest year available for comparable measures of income inequality — the Gini index has increased 7.6%.

Looking to explain the decrease, Census statisticians point to several policies that expired in 2022, including economic impact payments and the expanded Child Tax Credit introduced in response to the COVID-19 pandemic, which contributed to the increase in post-tax income inequality at the bottom of the income distribution.

What drives income inequality?

A decrease in the Gini index indicates that the distribution of income has become more equal. However, this indicator does not offer insight into how income inequality decreased.

The median represents the midpoint (50th percentile) of the income distribution. Comparing how incomes changed at different points along the income distribution can tell us what is driving income inequality.

The 2022 data suggest that declines in real income at the middle and top of the income distribution drove the decrease in the Gini index.

At the 90th percentile, 10% of households in 2022 had income above $216,000, down 5.5% from the 2021 estimate of $228,600.

However, at the 10th percentile, 10% of households had income at or below $17,100 in 2022, not statistically different from 2021 ($16,890).

The ratio of the 90th- to 10th-percentile (inequality between the top and bottom of the income distribution) decreased from 13.53 in 2021 to 12.63 in 2022. That means income at the top of the income distribution was 12.63 times higher than income at the bottom, a 6.7% decrease from 2021.

The ratio of the 90th- to 50th-percentile (inequality between the top and middle of the income distribution) also decreased — down 3.3% from 2.99 in 2021 to 2.90 in 2022.

The ratio of the 50th- to 10th-percentile (inequality between the middle and bottom of the income distribution) was not significantly different over this period, further indication that the lower end of the income distribution did not drive the change in inequality.