By the Blouin News Business staff

Income inequality: U.S. vs. Germany

by in Global Economy.

U..S President Barack Obama and German President Angela Merkel on May 2, 2014 in Washington, DC. AFP/Getty Images

U..S President Barack Obama and German President Angela Merkel on May 2, 2014 in Washington, DC. AFP/Getty Images

There is a big difference in the ways societies perceive income inequality and the reality of the global malign. The contrast is especially stark between the world’s largest economy, the United States, and the fourth biggest one, Germany. In Germany far more people belong to the middle class and substantially less to the bottom class than the Germans believe. Meanwhile the U.S. citizens are the only ones which underestimate the extent of their bottom class. These two conclusions are part of a research paper by the Cologne-based IW economic institute: ‘Subjective perceptions of inequality and redistributive preferences: An international comparison.’ The report compared actual and perceived income levels in the U.S. and 23 European Union countries. Here we will focus on what it had to say on the two biggest economies on both sides of the Atlantic Ocean.

Germany

Source: Cologne Institute for Economic Research (IW).

Source: Cologne Institute for Economic Research (IW)

The different shapes in Figure 1 show that although the majority of the population is assumed to be in the lower part of the society, according to the income distribution the bigger part of the population is situated in the middle income classes. The finding that the majority of the German population belongs to the middle income class does not depend on the specific demarcation chosen here – and beyond, it is not dependent on income as demarcation criteria. Basically all social class studies for Germany share the result that the majority of the population classifies as traditional middle class. Generally, if the society is demarcated on the basis of socio-cultural criteria or self-assessment, the size of the German middle class even increases.

United States

Source:

Source: Cologne Institute for Economic Research (IW)

With a Gini coefficient of 0.417 the U.S. represents the other extreme of income inequality in the observed country sample. This is also clearly reflected in the illustration of income classes (right-hand side of the figure above). Nearly one third of the population has a disposable income below 60% of median income. Simultaneously, the U.S. reveals the largest share of income rich: Almost 7% of the population dispose of an income above 250% of median income. In spite of this large difference in measured income inequality, the perception of the society (left-hand side of the figure) rather resembles the perceived inequality.

The income inequality problem hinders every economy but the U.S. certainly has some work to do: it’s the only country in the study with a more optimistic perception of its society than suggested by the actual distribution of incomes. Yet the report points out a reminder that the fact that citizens there see the inequality of their society in a more optimistic light than its reality, is not new. According to subjective estimations, the wealth share of the richest quintile is equal to 59% – in reality it is almost 84%.

Read more: The vicious cycle of income inequality in one graph.