Measures of Income Inequality to Know for Public Economics

Understanding income inequality is crucial in Public Economics, as it affects social welfare and economic policies. Key measures like the Gini coefficient, Lorenz curve, and Palma ratio help analyze disparities, guiding effective interventions for a fairer society.

1. Gini coefficient

   • Measures income inequality on a scale from 0 (perfect equality) to 1 (perfect inequality).
   • A Gini coefficient of 0.3 is often considered moderate inequality, while 0.5 or higher indicates high inequality.
   • Useful for comparing income distribution across different countries or regions.

2. Lorenz curve

   • Graphically represents income distribution, showing the proportion of total income earned by cumulative percentages of the population.
   • The further the curve is from the line of equality (45-degree line), the greater the inequality.
   • Helps visualize the impact of income distribution changes over time.

3. Income quintiles and deciles

   • Quintiles divide the population into five equal groups based on income, while deciles divide it into ten.
   • Useful for analyzing income distribution and understanding the share of income held by different segments of the population.
   • Helps identify disparities between the highest and lowest income groups.

4. Palma ratio

   • Compares the share of income of the top 10% to the bottom 40% of the population.
   • Highlights the disparity between the wealthiest and poorer segments, focusing on the extremes of the income distribution.
   • A higher Palma ratio indicates greater inequality.

5. 20:20 ratio

   • Compares the income of the richest 20% of the population to the poorest 20%.
   • A straightforward measure of inequality that highlights the gap between the highest and lowest earners.
   • Useful for assessing social equity and economic mobility.

6. Theil index

   • A measure of income inequality that can be decomposed into within-group and between-group inequality.
   • Ranges from 0 (perfect equality) to infinity, with higher values indicating greater inequality.
   • Provides insights into the sources of inequality, such as regional or demographic disparities.

7. Atkinson index

   • Focuses on income distribution and social welfare, allowing for different levels of inequality aversion.
   • Ranges from 0 (perfect equality) to 1 (extreme inequality), with higher values indicating greater inequality.
   • Useful for policymakers to assess the impact of income redistribution policies.

8. Income share ratios (e.g., top 1% or 10%)

   • Measures the proportion of total income earned by the top 1% or 10% of earners.
   • Highlights the concentration of wealth and its implications for economic inequality.
   • Useful for understanding trends in wealth distribution over time.

9. Poverty rate

   • The percentage of the population living below the poverty line, indicating economic hardship.
   • A critical measure for assessing the effectiveness of social welfare programs and economic policies.
   • Helps identify vulnerable populations and target interventions.

10. Percentile ratios (e.g., 90/10 ratio)

    • Compares the income of the 90th percentile to the 10th percentile, illustrating the income gap between high and low earners.
    • A higher ratio indicates greater income inequality.
    • Useful for understanding the distribution of income across different segments of the population.