Five years ago I published a working paper arguing that the measures of income inequality derived from the IRS data are highly biased as estimated from a varying share of population. Physics students are well aware that no conservation laws are applicable to open systems with unknown exchange with environment. For economists, it is not a good hint and they continue to present lots of inequality estimates associated with highly fluctuating population basis. Figures 1 shows the evolution of the share of population with income and Figure 2 depicts the share of personal income in real GDP as determined by the IRS and by the Census Bureau during the Current Population Survey. One can see that the IRS population basis varying around 60% from the level of working age population and the CB covers around 90% of the population. Moreover, the share of personal income in real GDP is only 55% for the IRS and 70% for the CB. For a physicist, the estimates based on the CB data look more reliable than those from the IRS data. It should be noted, however, that people without income have to be included in the estimates of inequality to cover the whole working age population. (We have estimated the Gini ratio for the whole population.)
The Census Bureau has been reporting detailed results of the CPS since 1994. Figure 3 depicts the evolution of Gini ratio for the U.S. It has been decreasing since 1994 with a clear minimum in 2007. We also included the share of population without income in order to illustrate the decreasing basis for the Gini ratio estimate. When these people without income are included the Gini estimates should increase and the inequality should be slightly higher.
Figure 1. Share of population with income as estimated by the IRS and Census Bureau.
Figure 2. Share of personal income in total GDP as estimated by the IRS and Census Bureau.
Figure 3. Evolution of Gini ratio and the share of population without income as estimated by the U.S. Census Bureau.
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