Measuring Income Inequality

Measuring Inequality

• Inequality means not being equal in opportunity, status or rights.
• The concept of inequality is central to social justice theories.
• The term "economic inequality" often refers to inequalities in income, monetary resources, or overall living conditions.

Focus on Income Inequality

• Income inequality reflects disparities in living standards and is linked to the distribution of income within a population.
• Inequality is broader than poverty because it considers the distribution across the entire population, not just those below a poverty line.
• Measures of inequality are independent of the average income.
• Indicators of income distribution is a common way to assess income inequality.

Shares of Income

• Dividing the population into quintiles (five groups of 20% each) is a way to measure inequality.
• Other possible divisions: deciles and percentiles.
• Levels or proportions of income or expenditure are reported for each group, ranging from poorest to richest.

Summary Measures

• Information is easily understood in quintiles.
• Synthetic ways to measure inequality are useful.
• The ratios (decile or quintiles) and the Gini coefficient and Lorenz curve are examples of common summary measures.

Ratios (Decile or Quintile)

• Ratios assesses the "distance" between two income groups, where the income share of the rich is shown as a multiple of the poor.
• The formula for this is computed as the ratio of the income of the richest x% and the income of the poorest x%.
• Ratios may be calculated using deciles, quintiles or other percentiles.
• D90/D10 represents the ratio of the income of the 10% richest to that of the 10% poorest.
• S80/S20 represents the ratio of the income of the 20% richest to that of the 20% poorest.

Gini Coefficient and Lorenz Curve

• The Gini coefficient is the most widely used measure of inequality.
• Its values range between 0 and 1.
• 0 is a situation of total equality.
• 1 is a situation of total inequality (one person has all income and the other people hold zero income)
• The Lorenz Curve is where it is based, which helps to the distribution of a given variable (usually income).
• The Gini coefficient is constructed by graphing the cumulative percentage of individuals/families on the horizontal axis.
• The cumulative percentage of income is on the vertical axis, from poorest to richest.
• The Gini coefficient is defined as A / (A + B), where A and B are the areas identified in the graph
• With A = 0, the Gini coefficient is equal to zero, total equality.
• With B = 0, the Gini coefficient is equal to one, total inequality.
• Gini coefficient at 0.35, some multiply by 100 with coefficient at 35.

Setting the Scene: Wages and Income Inequality

• Wages are very important in income inequality.
• Transfers and capital income will also contribute.

Causes of Inequality: Education

• One of the main factors is education.
• There is an increase in returns with higher education
• The supply of less skilled workers may have grown faster than the supply of workers with higher education.
• Demand has increased for skilled workers relative to demand for less skilled workers.
• Changes in institutional forces, such as declining trade unions, may have lowered wages of less skilled workers.

Globalization

• Advanced economies face increasing competition from lower-wage countries.
• Job loss and outsourcing has impacted workers with less skills where income decreases.
• There is an increased demand for higher-educated workers where the wage of skilled worker rises.

Technological Change

• There have been advancements of ICT's where low-skilled workers are displaced and there is a demand for better educated workers.
• Increasing the productivity of skilled workers more than that of unskilled workers.
• Computerization of processe requires more skilled workers or the acquisition of new qualifications.

Other Explanations: Market Forces and Social Context

• Market forces (supply and demand) influence, but are not the only determinants.
• Labour market is different from product market

Labour-Market Matching

• Matching and search models determine frictions in the market.
• Firms finding and workers filling jobs is costly.
• Matching a worker to a vacancy creates a positive surplus where the worker might have some degree of negotiation power.

Demand & Supply & Bargaining

• Demand and supply do not fully determine market wage; allow for bargaining.
• Factors aside bargaining power: appeal to norms of equitable payment, pay scales.

Trade Unions and Collective Bargaining

• The widening of wage inequality has coincided with a decline in trade unions.
• What is affecting the economy might explain the decline in unions

The Share of Profits

• The share of wage income has been declining.
• The share of profits/capital income has been on the rise.

Companies and Market Power

• Companies, firms, enterprises play a role in income inequality, especially when recognizing their market-power.
• Firms can determine their own pricing policies.

Consequences of Inequality

• Inequality can negatively impact economic growth.
• A decreased ability for lower-income households/poor people to stay healthy can play a part.
• Concentration of incomes can reduce aggregate demand.
• Extreme inequality may damage trust and social cohesion, leading to conflicts, discouraging investment.
• Evidence is related to the relationship between inequality and negative outcomes.
• Inequality has affected Trust, Crime, Health, Education, and Social mobility.

Psychosocial Theory

• Income inequality causes health and social problems due to status anxiety.
• Income inequality places people in a hierarchy which increases status competition and creates poor health.

Neo-Material Theory

• There is evidence that individual material circumstances has impacts
• How actual income levels affect wellbeing, will affect material circumstances and other outcomes.