Let’s go back to the tables I included in my previous post, repeated here for convenience. First, here’s Howard County vs. nearby counties and other jurisdictions:

and then Maryland vs. other high-income states and the United States as a whole:

Note the third column of the above tables, the Gini coefficient. The Gini coefficient (or Gini index, as the Census Bureau refers to it) measures the distribution of income, as opposed to the level of income. Its calculation is a bit more complicated than that for median household income; rather than discuss it here I’ll just refer you to my previous explanation.

For present purposes you just need to know that the Gini index has values between 0 and 1 (or 0% and 100%, depending on the source), that a value of 0 corresponds to a completely equal distribution of income (all households’ income is the same) and a value of 1 (or 100%) corresponds to a completely unequal distribution of income (one household receives all income, all other households have none). In practice almost all societies have Gini index values somewhere between 0.30 and 0.60. Also note that the Gini coefficient can be computed based on before-tax income or after-tax income; the Census Bureau figures are computed using before-tax income.

Recall again that the Gini index measures distribution of income, not the level of income. So, for example, for 2012 Howard County had a Gini index of 0.3909. Since this was below the overall US value of 0.4757, distribution of income in Howard County was somewhat more equal than in the US as a whole. Catoosa County in Georgia had a Gini index of 0.3904, almost identical to that of Howard County, but its median household income was only $42,251, almost as low as that of Baltimore city. Howard County is a place where everyone is (relatively) equally rich, Catoosa County is a place where everyone is (relatively) equally poor.

This point also applies to places of relative income inequality as measured by the Gini index: For example, Fairfield County in Connecticut (mentioned in the previous post) has one of the highest Gini index values in the United States at 0.5459, along with a median household income of $79,841 (ranked 43 in the United States), while Richmond, Virginia, has almost the same Gini index (0.5347) but very low household income ($38,926, less than Baltimore City). Fairfield County is rich and unequal, Richmond poor and unequal.

Why is income inequality lower in Howard County—not to mention Loudoun County, which ranked 5th in the US in 2012 in terms of income equality? It’s simply that the economies in both counties are heavily driven by Federal spending, with many people in the counties working for either the government or a government contractor. At the low end government jobs pay better than equivalent private sector jobs, while at the high end they pay worse.

This is true of contractor jobs as well: For example, a skilled programmer will be paid well if they work for a government contract, especially if they have a security clearance, but not as well as if they worked for an investment bank or hedge fund. It’s true also of entrepreneurs: Most people can name several tech billionaires (for example, Steve Jobs, Jeff Bezos, Mark Zuckerberg, Larry Page and Sergey Brin) but would be hard-pressed to name any billionaires who made their fortunes through government contracting. (Ross Perot is the only one I can think of at the moment.)

The net effect is that the spread of incomes in Howard, Loudoun, and other suburban Maryland and Virginia counties is compressed relative to other places: fewer really poor people, and fewer really rich people, but lots of people making good incomes.

So is relative income equality only a function of a government-dominated economy? Not necessarily; for example, per Wikipedia Switzerland, a country in the top 5 of the Heritage Foundation Economic Freedom Index, has a Gini coefficient of 0.409, just a tad above Howard County’s, while South Korea, a country with a thriving export economy, has a Gini coefficient of 0.344, below Loudoun County’s and identical to that of Sherburne County, Minnesota, the US county with the least income inequality in 2012.¹ (Again, note that these figures, like the US figures, are pre-tax; many countries have after-tax Gini coefficients below 0.3 due to very progressive tax structures and extensive social insurance programs.)

The conclusion, I think, is that income inequality is not simply driven by pure market forces but reflects cultural attitudes as well: social norms about what constitutes an adequate minimum wage (or indeed whether there should be a minimum wage at all), subjective judgements about how much CEOs and other senior managers contribute to a firm’s productivity compared to the typical employee, political decisions about how much government fiscal, monetary, and other policies should promote the interests of those who hold stock and other capital assets vs. those who do not, and so on. In 1993 the entire United States had a Gini coefficient of 0.389, comparable to that of Howard County today.² Thus in one sense Howard County is not an outlier that doesn’t reflect the rest of America; it just reflects the America of twenty years ago rather than that of today.

UPDATE: Added Charles County, Calvert County, and St Marys County.

The top-line news (which you’ll no doubt read soon enough in mainstream news outlets) is that we’re number 2: at $108,844 Howard County had the second-highest median household income of any US county in 2012, topped only by Loudoun County, Virginia, at $117,876. (Incidentally, what is it with Howard County always coming in second? This time it was Loudoun County, last time it was Eden Prairie MN. When do we get to be first?)

This is a major jump up from 2011, in which Howard County was in fifth place (at $98,953). Loudoun County was also first in 2011 at $119,134, but unlike Howard its median household income has decreased since then. Note that you can’t directly compare the 2011 and 2012 figures, because they’re not adjusted for inflation, but the relative rankings would still be the same.

So much for the headlines; now for the rest of the story.

Here’s a comparison of how Howard County fared in 2012 relative to its neighboring counties in Maryland, the counties of Northern Virginia, and the two closest major cities (I’ll come back to the Gini coefficient in the fourth column later):

Here’s the top ten states for 2012, plus the figures for the US as a whole:

Now let’s talk about what these numbers mean. First, where do they come from, and how accurate are they? The figures above are from the Census Bureau’s American Community Survey (ACS), and are taken from tables B19013, “Median household income in the past 12 months (in 2012 inflation-adjusted dollars),” and B19083, “Gini index of income inequality,” respectively of the ACS 2012 1-year estimates. (“Gini index” is an alternate term for “Gini coefficient.” I’m using the latter term for consistency with my earlier posts.)

These are statistical estimates based on a limited sample, and have a substantial margin of error (plus or minus $2,972 in the case of the Howard County estimate). Thus the more accurate statement would be that the Howard County median household income for 2012 was somewhere in the range of $105,000–113,000, pretty much the same as Fairfax County.¹

The next point is that we need to distinguish between income and wealth: income is what enables you to pay your mortgage, while wealth is what enables you to not need a mortgage in the first place. Headlines to the effect that Howard County is the second-wealthiest county in the US are misleading; it may be that there are other counties in the US where median household wealth (as opposed to income) is higher. For example, places like Fairfield County, Connecticut, home of hedge fund billionaires, almost surely have higher average household wealth than Howard County, and their median household wealth may be higher as well.

Other points: Household income is typically used as a measure instead of per capita income because households are the basic economic unit in most cases, and particularly with respect to major purchases like housing. All other things being equal, places where there are lots of two-earner families will have higher median household income than places where there are a lot of singles or one-earner families.²

The median household income is that income such that half of all households make more and half of all households make less. This is a better measure than average household income because average income can be misleadingly skewed upward by the presence of a few extremely high-income households: If a billionaire moved onto your street the average income of you and your neighbors would skyrocket, but the income of the typical neighbor (one who’s in the middle of the list of all neighbors ranked by income) would not be affected. The median household income is thus best thought of as a measure of what it means to be “middle class” in a particular locality, at least in terms of income.

This is an important point and worth expanding on, especially in looking the major jump in Howard County median household income from 2011 to 2012. There are at multiple ways in which median household income could grow:

Households across the board could include more people earning income, due to a higher rate of people living together instead of alone and/or to non-working spouses entering the labor force. Households across the board could also have higher income due to wage increases or other boosts to income (for example, selling stock that had appreciated).

Alternatively, the relative mix of households might change. For example, it might be that the high cost of living drives lower-income families (those below the current median household income) to move out of a particular area, while at the same time the perceived quality of life (schools, parks, libraries, etc.) influences higher-income families (those above the current median household income) to move into the area.

Any or all of these effects could be behind the jump in Howard County median household income from 2011 to 2012; teasing out the real story would require a more in-depth analysis the Census data (one I’m not prepared to take on at this time).

A final point about median household income: It gives a reasonably good picture of how a “middle income” household is doing, but it doesn’t tell us anything about how income is distributed among the various households. For example, suppose that the bottom 10% or 20% of households (by income) had their incomes cut in half, while the top 10% or 20% of households had their incomes doubled. This would not change the median household income at all, since half of all households would still be below the previous median value, and half still above.

So how do we measure the relative distribution of income across households, and how does Howard County stand on this measure? That’s the topic of my next post.

UPDATE: Added Charles County, Calvert County, and St Marys County to the list.

Chris Jackman (cjackman@hotmail.com) - 2013-09-23 12:36

You left Calvert County, MD ($87,449) off your list.

hecker - 2013-09-24 12:36

You’re right, I left Calvert County off the list; in my defense, I was focusing on the counties immediately neighboring Howard, and forgot about Calvert, Charles and St Marys County. Incidentally, at $87,449 Calvert County is 19th on the list of highest-income counties; Charles County is 15th at $90,880 and St Marys is 21st at $86,358. (Their Gini coefficients are 0.409, 0.3937, and 0.3779 respectively.)

Chris Jackman (cjackman@hotmail.com) - 2013-09-24 12:43

I just thought that you may want to include them since you posted several VA counties that are also in the Washington-Baltimore CSA.

hecker - 2013-09-25 03:15

You’re right. I updated the post to include them.