Measuring Inequality Can Be Misleading

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from NCPA,

It is easy to be misled by income inequality statistics. Alan Cole, economist at the Tax Foundation, explains why, using the example of Forbes’ list of the highest-paid musicians of 2014.

Cole explains that rap artist and record producer Dr. Dre took the top spot on the list, earning $620 million this year. His earnings dwarfed those of the other musicians on the list: they were five times that of second-highest earner Beyoncé Knowles. In fact, Dr. Dre alone earned more than the next seven musicians ranked below him combined.

But is he really out-earning everyone in the music industry? As Cole explains, Dr. Dre’s impressive financial performance in 2014 is largely due to a single event: the sale of his electronics company, Beats Electronics, to Apple. Cole writes that the value of the company — after eight years of work — was reflected in that single sale, causing the rapper’s income to spike dramatically. This is why, Cole says, it is important to look at multiple years of a person’s income — not just a single year — when trying to measure economic wellbeing and inequality. Looking only at a person’s earnings in one year, says Cole, “overstates the affluence of some and understates the affluence of others.” Indeed, this is something that NCPA Senior Fellow Richard McKenzie recently wrote about in an NCPA study, noting that typical income inequality measures ignore individuals’ movement up and down the income ladder from year to year.

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