The Unequal State of America: How we calculated inequality

Tue Dec 18, 2012 7:12am EST

(Reuters) - Reuters used two methods to track changes in income distribution in America.

First, we used the so-called Gini index, named after the 20th-century Italian economist who devised it. The index is a number between 0 and 1 that represents how equally household income is distributed across the population. Zero represents perfect equality: Every household has the same income. One means perfect inequality: Imagine an America in which Warren Buffett made all the income and everyone else, including Bill Gates, made nothing.

Using Gini, inequality has risen in each of the past two decades. Between 1989 and 2011, the index rose 6 percent nationally, to its highest level since the Census started measuring it in the 1960s. It rose in 49 of the 50 states. And it was rising even before the Great Recession struck. Between 1989 and 2007 - the last year for which data were unaffected by the slump - inequality rose 4 percent.

Gini gets at income distribution across the whole populace. To pinpoint the gap between richest and poorest, we used Census data, comparing the average income of the top 5 percent of households to that of the bottom 20 percent - for the country as a whole, and for each state plus Washington, D.C.

On this gauge, too, inequality rose. The top 5 percent on average earned 24 times as much as the bottom 20 percent in 1989. By 2011, that ratio was 28 to 1. The ratio grew nearly everywhere: Inequality rose in 47 of the 50 states and in the District of Columbia. Wyoming stayed flat. Louisiana and Mississippi became a bit more equal. Those southern states, however, still have two of the highest poverty rates and the lowest median incomes in the country. The rich-poor gap has eased a little for them, but it's still much greater than the national average.

In a handful of instances, changes were within the statistical margin of error:

In two of the 43 states showing a poverty increase, Kentucky and Arkansas, the increase was small enough to be within the margin of error.

Of the 28 that saw all three metrics worsen, the median-income decrease was within the error margin in three states: New Hampshire, New Mexico and Idaho.

In Mississippi, the Gini index dipped slightly, within the margin of error.

(Reporting By Himanshu Ojha; Edited by Michael Williams)