Income quintile

What Is Income Quintile?

An income quintile is a statistical measure that divides a population into five equal groups, each representing 20% of the total, based on their income. This analytical tool falls under the broader category of economic statistics and is widely used to analyze income distribution and economic inequality within a country or region. By dividing the population into these ordered segments from the lowest earners to the highest, researchers and policymakers can examine how income is distributed and track changes over time. Each income quintile encompasses a specific range of income, with the first quintile representing the lowest 20% of earners, and the fifth quintile representing the top 20%.

History and Origin

The use of statistical divisions like income quintiles to understand societal distribution has evolved alongside the development of modern economic analysis. While the exact origin of dividing populations into five equal income groups isn't tied to a single "invention," the systematic collection and analysis of income data by governmental and international bodies became prominent in the 20th century. For instance, the U.S. Census Bureau has been compiling and publishing historical income tables, including data categorized by income quintiles, for decades, providing a long-term view of changes in household and family incomes in the United States.¹²,¹¹,¹⁰ Similarly, organizations like the Organisation for Economic Co-operation and Development (OECD) regularly gather and disseminate data on income distribution and inequality across member countries, utilizing such divisions to highlight disparities and trends.⁹,⁸ This reflects a growing global focus on understanding and addressing issues related to income disparities and their implications for society.

Key Takeaways

• An income quintile divides a population into five equal segments, each representing 20% of the total, based on income levels.
• It is a fundamental tool for analyzing income distribution and socioeconomic disparities.
• Data from income quintiles can help illustrate changes in economic inequality over time and across different demographic groups.
• Policymakers use income quintile data to assess the impact of public policy on different segments of the population.

Formula and Calculation

Calculating income quintiles involves ordering a population by income and then dividing them into five equal groups. While there isn't a single "formula" in the algebraic sense for an income quintile itself, the process relies on statistical ranking and partitioning.

To determine income quintiles:

1. Gather Income Data: Collect household income or individual income data for the entire population under study.
2. Order Data: Sort all incomes from the lowest to the highest.
3. Divide into Quintiles:
   • The 1st quintile includes the lowest 20% of incomes.
   • The 2nd quintile includes incomes from the 21st to the 40th percentile.
   • The 3rd quintile includes incomes from the 41st to the 60th percentile.
   • The 4th quintile includes incomes from the 61st to the 80th percentile.
   • The 5th quintile includes the highest 20% of incomes (81st to 100th percentile).

For example, if a population has 100 households, each income quintile would contain 20 households. The income limit for each quintile is the highest income within that 20% group. Official statistics often report the upper-income limit for each quintile and the mean income or median income within each quintile.⁷

Interpreting the Income Quintile

Interpreting income quintiles involves understanding the income thresholds that define each group and the share of total income received by each quintile. For example, if the upper limit for the first quintile is $25,000, it means that 20% of the population earns $25,000 or less. Comparing the mean income of the lowest quintile to that of the highest quintile provides a clear picture of income disparities. A widening gap between the income earned by the top quintile and the bottom quintile indicates increasing economic inequality.

Analysts also observe changes in the percentage of total national income held by each quintile over time. If the share of aggregate disposable income received by the top quintile increases while the share of the lower quintiles decreases, it suggests a concentration of wealth at the top. This analysis provides context for assessing the financial health and fairness of an economy and informs discussions about income redistribution and social mobility.

Hypothetical Example

Consider a small town with 100 households and their annual household income data.

1. Collect and Sort Data: All 100 household incomes are collected and sorted from lowest to highest.
2. Determine Quintile Sizes: Since there are 100 households, each quintile will contain 20 households (100 households / 5 = 20 households per quintile).
3. Identify Income Ranges:
   • 1st Quintile (Lowest 20%): Households 1-20. Let's say their incomes range from $15,000 to $30,000.
   • 2nd Quintile (21-40%): Households 21-40. Their incomes might range from $30,001 to $50,000.
   • 3rd Quintile (41-60%): Households 41-60. Their incomes could be $50,001 to $75,000.
   • 4th Quintile (61-80%): Households 61-80. Their incomes might range from $75,001 to $110,000.
   • 5th Quintile (Highest 20%): Households 81-100. Their incomes could range from $110,001 to $500,000+.

This breakdown allows for an easy visual and statistical comparison. For instance, if the mean income of the 1st quintile is $22,000 and the mean income of the 5th quintile is $250,000, it clearly illustrates the income disparity within this town.

Practical Applications

Income quintiles are widely used in various fields for analysis and policy development:

• Economic Analysis: Economists and researchers use income quintiles to study economic inequality, track changes in the income shares of different groups, and understand the impacts of economic cycles on various segments of the labor force. Data from entities like the U.S. Census Bureau and the Federal Reserve Board frequently utilize quintile analysis to present income and wealth distribution trends.⁶,⁵
• Public Policy and Social Programs: Governments utilize income quintile data to design and evaluate social programs, assess the effectiveness of tax policies, and implement measures aimed at poverty reduction or income redistribution. For instance, understanding the income levels of the lowest quintiles is crucial for setting effective poverty line thresholds and targeted assistance programs.
• Market Research and Business Strategy: Businesses analyze income quintiles to understand consumer purchasing power across different segments, tailor products and services, and identify target markets. This can influence decisions on pricing, marketing, and product development.
• Academic Research: Sociologists and policy analysts frequently employ income quintiles in their research to explore topics such as social mobility, access to education and healthcare, and the broader social implications of income distribution.

Limitations and Criticisms

While income quintiles provide a straightforward way to understand income distribution, they have several limitations:

• Household vs. Individual Income: Often, income quintiles are based on household income rather than individual income. This can be misleading because households vary significantly in size and composition. A household in a higher quintile might have multiple income earners, while a household in a lower quintile might have only one, or none, even if per-person income is comparable in some cases.⁴
• Snapshot in Time: Quintiles provide a static snapshot of income at a particular moment. They do not capture income mobility—how individuals or households move between quintiles over time—which is a key aspect of social mobility.
• Exclusion of Non-Cash Benefits and Wealth: Income quintiles typically measure cash income (e.g., wages, salaries, some government transfers) and may not fully account for non-cash benefits (like food stamps or housing assistance) or the accumulation of wealth distribution (assets, investments, capital gains). This can lead to an incomplete picture of a household's overall financial well-being.
• Lack of Detail within Quintiles: Each quintile represents a broad 20% segment. Significant disparities can exist within a single quintile, especially within the highest quintile, where the top 1% or 0.1% can skew the average income considerably. A study from the University of South Florida highlights how focusing solely on quintiles can obscure crucial details, such as the disproportionate growth of income at the very top of the distribution.
• ³ Geographic and Cost-of-Living Differences: Income quintiles are usually presented at a national level, which can mask significant regional differences in cost of living. An income level that places a household in a middle quintile in a low-cost area might place them in a lower quintile in a high-cost urban center, affecting their real purchasing power.

Income Quintile vs. Income Decile

The primary difference between an income quintile and an income decile lies in the number of divisions. Both are statistical measures used to analyze income distribution by dividing a population into equally sized groups based on income.

While income quintiles offer a quick overview, income deciles provide finer detail, allowing for a more precise analysis of income disparities and the composition of income groups. For instance, examining the income of the top income decile can reveal more about wealth concentration than just looking at the top income quintile, which lumps the top 10% together with the next 10%.

FAQs

How are income quintiles used by governments?

Governments use income quintiles to analyze income distribution and economic inequality within a country. This data helps them understand the financial well-being of different segments of the population, assess the impact of public policy such as taxes and social programs, and formulate strategies to address poverty and promote economic growth.

Do income quintiles account for wealth?

Typically, income quintiles measure annual cash income (like wages, salaries, and other taxable income). They do not directly account for wealth, which includes assets like real estate, stocks, and other investments. While income can contribute to wealth accumulation, separate measures like wealth distribution quintiles or deciles are used to analyze assets. The Federal Reserve Board, for example, publishes data on the distribution of household wealth, which can be analyzed by income percentile.,

#²#¹# What are the top and bottom income quintiles?
The bottom income quintile represents the 20% of the population with the lowest incomes. Conversely, the top income quintile represents the 20% of the population with the highest incomes. These two quintiles are often the focus when discussing income disparities and economic inequality.