Income quintiles: Meaning, Criticisms & Real-World Uses

What Are Income Quintiles?

Income quintiles are a fundamental concept within economic statistics that divide a population, such as households or individuals, into five equal groups based on their income levels. Each quintile represents 20% of the total population, ordered from the lowest income earners to the highest. This method provides a clear snapshot of income distribution within a given society, allowing for analysis of disparities and trends in economic well-being. By examining income quintiles, economists and policymakers can better understand how income is spread across different segments of the population, distinguishing between lower, middle, and higher income brackets.

History and Origin

The practice of dividing economic data, such as income, into quantiles (like quintiles, deciles, or percentiles) emerged as a statistical tool to analyze and present distributional information. Government agencies and researchers began systematically collecting and reporting income data in this manner to track societal changes. In the United States, the U.S. Census Bureau has been compiling and publishing historical income tables, including data for income quintiles, since the mid-20th century, with records for household income quintiles dating back to 1967.²⁵,²⁴ This long-standing data collection provides a crucial basis for understanding long-term trends in income inequality.

Key Takeaways

Income quintiles divide a population into five equally sized groups based on their income, from the lowest to the highest 20%.
They serve as a primary tool for analyzing income distribution and inequality within a country or region.
Data on income quintiles is routinely collected and published by governmental statistical agencies, such as the U.S. Census Bureau and the Federal Reserve.²³,²²
Analyzing changes in income quintiles over time helps reveal shifts in economic opportunity and living standards across different population segments.
Income quintiles highlight how the aggregate household income is shared among the populace.

Formula and Calculation

Calculating income quintiles involves a straightforward statistical process:

Gather Income Data: Collect income data for every individual or household in the population under study.
Sort Data: Arrange all incomes in ascending order, from the lowest to the highest.
Divide into Quintiles: Divide the sorted data set into five segments, each containing an equal number of individuals or households (20% of the total population).

For example, if a population has 100 million households, each income quintile would represent 20 million households. The income thresholds that mark the boundaries between these groups are then identified. These thresholds define the upper limit of the first quintile, the second, and so on, up to the top 20%. The mean income or median income for each quintile can then be calculated to understand the average income within each group.

Interpreting the Income Quintiles

Interpreting income quintiles involves examining the income ranges for each group and the share of total income received by each quintile. For instance, the U.S. Census Bureau provides detailed tables showing the income limits for each fifth and the top 5% of households.²¹ This data allows for direct comparison. If the income share of the highest quintile increases significantly over time while that of the lowest quintiles stagnates or declines, it indicates rising income inequality. Conversely, a more evenly distributed share of total income across the quintiles would suggest greater equality.

It is also common to examine the average or median income within each quintile. Observing trends in these figures can illustrate whether all income groups are experiencing economic growth or if growth is concentrated at certain income levels. These measures provide insights beyond a single aggregate number for the entire population.

Hypothetical Example

Consider a small economy with 100 households, and the total annual income generated in this economy is $10 million. To calculate income quintiles, the households are first ranked from the lowest annual income to the highest.

First Quintile (Lowest 20%): Households 1-20. Suppose their combined income is $500,000.
Second Quintile (21-40%): Households 21-40. Their combined income might be $1,200,000.
Third Quintile (41-60%): Households 41-60. Their combined income could be $2,000,000.
Fourth Quintile (61-80%): Households 61-80. Their combined income might be $2,800,000.
Fifth Quintile (Highest 20%): Households 81-100. Their combined income could be $3,500,000.

In this example, the actual income thresholds would be the income level of the 20th, 40th, 60th, and 80th households. This breakdown clearly shows how the total $10 million in income is distributed. The average income for the households in the fifth quintile is significantly higher than those in the first quintile, illustrating the income disparity within this hypothetical economy and providing data points for analysis of income distribution.

Practical Applications

Income quintiles are widely used in various financial and economic analyses:

Economic Policy Analysis: Governments and international organizations use income quintiles to assess the effectiveness of fiscal policy, welfare programs, and tax reforms on different income groups. For instance, changes in disposable income across quintiles can indicate whether policies are reducing or exacerbating inequality.
Social Welfare Studies: Researchers utilize income quintiles to study poverty, social mobility, and the standard of living. By tracking individuals or households across quintiles over time, insights into economic mobility can be gained.
Market Research and Business Strategy: Businesses analyze income quintiles to understand consumer purchasing power and tailor products and services to specific income brackets. Trends in quintile income can influence predictions for consumer spending.
Academic Research: Economists and sociologists employ income quintiles in studies on income inequality, wealth distribution, and the drivers of economic disparities. Organizations like the Federal Reserve conduct the Survey of Consumer Finances (SCF), which provides data on income across different quintiles, offering detailed insights into the financial health of U.S. families.²⁰,¹⁹

The OECD, for instance, maintains an extensive Income Distribution Database (IDD) that provides comparable data on income inequality across its member countries, often presented using quintiles, to facilitate cross-country analysis of economic disparities.¹⁸,¹⁷

Limitations and Criticisms

While income quintiles offer a valuable framework for understanding income distribution, they have certain limitations and face criticisms:

Oversimplification: Grouping 20% of the population into a single quintile can mask significant variation within that group. For example, the "top quintile" includes individuals earning just above the fourth quintile threshold as well as the ultra-wealthy, whose incomes may be vastly different. This can obscure the true extent of inequality at the very top of the income spectrum.¹⁶
Household Composition: Quintiles often use household income, but household size and composition vary greatly. A single-person household with a modest income might be in a lower quintile than a multi-earner household with a similar total income, but the per-person income and standard of living could be very different. Adjustments for household size are sometimes made, but not universally.¹⁵
Exclusion of Non-Cash Benefits and Taxes: Raw income quintile data from sources like the U.S. Census Bureau often reflects pre-tax, pre-transfer income, which does not fully capture the impact of government programs (like Social Security or food stamps) or taxes. This can lead to an overestimation of inequality if not considered.¹⁴
Snapshot vs. Mobility: Income quintiles typically represent a single year's income. They do not fully account for economic mobility—how individuals move between income groups over their lifetime due to career progression, retirement, or other life events. Many individuals start in lower quintiles when young and move to higher ones in their peak earning years.
*¹³ Income vs. Wealth: Income quintiles focus solely on earned and received income, not accumulated wealth distribution. A household in a lower income quintile might have significant assets, while a household in a higher income quintile could have substantial debt. These measures reflect current earnings rather than net worth.

Income Quintiles vs. Gini Coefficient

Income quintiles and the Gini coefficient are both crucial tools in analyzing income inequality, but they provide different perspectives. Income quintiles offer a granular view by dividing the population into five distinct segments and showing the income range or share of total income for each. This allows for specific observations, such as "the top 20% of households earn X% of total income." The Gini coefficient, on the other hand, provides a single, aggregate number between 0 and 1 (or 0 and 100), where 0 represents perfect equality (everyone has the same income) and 1 (or 100) represents perfect inequality (one person has all the income).,
¹²
While income quintiles show where income is distributed across different slices of the population, the Gini coefficient gives an overall measure of the degree of inequality. Quintiles can reveal disparities between the top and bottom or middle, while the Gini coefficient offers a quick, summary statistic for comparison across different countries or time periods. Both are complementary; quintiles allow for detailed segment analysis, while the Gini coefficient provides a broad indicator of the entire income distribution's shape.

FAQs

How are income quintiles determined?

Income quintiles are determined by ranking all individuals or households in a population by their income from lowest to highest, then dividing this ranked list into five equal groups, each representing 20% of the total population. The income level that marks the boundary between these groups defines the quintile thresholds.,
¹¹
¹⁰### Why are income quintiles used in economic analysis?

Income quintiles are used to analyze income distribution and income inequality within a population. They help economists and policymakers understand how income is spread across different segments of society, identify disparities, and assess the impact of economic trends or policies on various income groups. This provides a more detailed picture than simply looking at aggregate measures like average income.

What is the "top 5 percent" often referred to alongside income quintiles?

The "top 5 percent" refers to the highest-earning 5% of the population, which is a subgroup of the highest income quintile (the top 20%). Statistical agencies, such as the U.S. Census Bureau, often provide specific data for this elite group to highlight the concentration of income at the very top of the distribution.,
⁹

Do income quintiles account for household size?

Typically, raw income quintile data from sources like the U.S. Census Bureau does not explicitly adjust for household size. This means a household of four with a given income would be compared directly to a single-person household with the same income. However, some researchers and organizations may use "equivalized income," which adjusts household income based on the number of adults and children to provide a more accurate measure of economic well-being per person.,
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⁷### What are the main data sources for income quintiles?

Key sources for income quintile data include national statistical agencies. In the United States, the U.S. Census Bureau publishes extensive "Historical Income Tables" based on the Current Population Survey (CPS)., ⁶T⁵he Federal Reserve Board's triennial Survey of Consumer Finances (SCF) also provides detailed information on family incomes across quintiles., ⁴I³nternationally, the Organisation for Economic Co-operation and Development (OECD) compiles an Income Distribution Database with comparable data for many countries.,[²¹](https://www.oecd.org/en/data/datasets/income-and-wealth-distribution-database.html)