1. Measuring Income Inequality

2. What is inequality?
From Merriam-Webster:
in·equal·i·ty Function: noun 1 : the quality of being unequal or uneven: as a : lack of evenness b : social disparity c : disparity of distribution or opportunity d : the condition of being variable : changeableness
2 : an instance of being unequal

3. Our primary interest is in economic inequality.
In this context, inequality measures the disparity between a percentage of population and the percentage of resources (such as income) received by that population.
Inequality increases as the disparity increases.

4. If a single person holds all of a given resource, inequality is at a maximum. If all persons hold the same percentage of a resource, inequality is at a minimum.

5. Economic Inequalities can occur for several reasons:
Personal Preferences – Relative valuation of leisure and work effort differs
Social Process – Pressure/Opportunity to work or varies across particular regions or areas
Public Policy – tax, labor, education, and other policies affect the distribution of resources

6. Why measure Inequality?
Measuring changes in inequality helps determine the effectiveness of policies aimed at affecting inequality and generates the data necessary to use inequality as an explanatory variable in policy analysis.

7. The Gini Coefficient
The Gini Coefficient has an intuitive, but possibly unfamiliar construction.
To understand the Gini Coefficient, one must first understand the Lorenz Curve…
Don’t worry, we will only look at theory
(not math – this is not econ...)

8. Cumulative Population
The Gini Coefficient
An equality diagonal represents perfect equality: at every point, cumulative population equals cumulative income.
The Lorenz curve measures the actual distribution of income.
A – Equality Diagonal Population = Income
B – Lorenz Curve
C – Difference Between Equality and Reality
Cumulative Income A C B
Cumulative Population

9. The Gini Coefficient
When there is perfect equality, the Lorenz curve is the equality diagonal, and the value of the Gini Coefficient is zero.
When one member of the population holds all of the resource, the value of the Gini Coefficient is one.

10. The Gini Coefficient Pros
Generally regarded as gold standard in economic work
Incorporates all data
Allows direct comparison between units with different size populations
Cons
Requires comprehensive individual level data
Requires more sophisticated computations
Measures only economic inequality

11. Gini Coefficients:

12. Data from

14. There are less poor people in the world today than there were 26 years ago, but the world is more unequal… Between 1970 and 2005 appr. 2/3 of all OECD countries experienced an increase in income inequality...

15. According to 2007 calculations, CEOs of the top 15 companies in the USA each earned 520 times more than average worker, up from 360 times in 2003…
Similar patterns have been registered in Australia, Germany, H.K., Netherlands, Canada, Mexico, Latin America, Sub-Saharan Africa

16. Richest 10% to Poorest 10% 10 to 1 in Italy, Japan, Korea 14 to 1 in
France, Japan, Spain are only OECD countries where income inequality has not increased significantly since the 1970s
10 to 1 in
Italy, Japan, Korea
14 to 1 in
Israel, Turkey and USA
27 to 1
Mexico & Chile

17. Increased Income Inequality
Higher crime rates
Lower life expectancy
Slowdown of economic growth
Malnutrition
Increased likelihood of children taken out of school to work