In 2015, Greece, Thailand, Israel and the UK were also unequal. In other words, the four countries had the same Gini coefficient, a common measure of income inequality.
The number suggests that the income distribution in the four countries was the same. However, a closer look at the poorest and wealthiest people in these societies shows a very different picture of inequality. The ratio of income held by the richest 10% to the poorest 10% varied considerably from 13.8 in Greece to 4.2 in the UK.
This divergence has led some economists to argue that the Gini should be put back in its bottlewhile the others defend its continued use. Most agree, however, that to understand inequality, the century-old indicator is insufficient by itself.
What is the Gini coefficient?
The Gini coefficient is the best-known measure of income inequality. A Gini coefficient of zero means there is an equal distribution of income, while a number closer to one indicates greater inequality. The lower the Gini coefficient, the more the society is said to be egalitarian.
The Gini coefficient and the Lorenz curve
The Gini coefficient is based on the work of Max Lorenz, an American economist in the early 20th century, who established a way to plot the distribution of income in a population called the Lorenz curve.
the Attractiveness of the Gini coefficient comes from its simple-to-understand range from 0 to 1 and its aim to encapsulate a complex distribution in a single digit. This facilitates its use as a basis for comparison between countries with very different population sizes.
“People like a single number. It’s interesting in that it’s a measure of the whole income distribution,” says Dominic Webber, Head of Household Income Analysis in the Kingdom -United. Office of National Statistics (ONS). “There’s more going on than that number can tell, but it’s still really strong and powerful” to have just one number, he says.
Perhaps most important to its success is its widespread and continued use. Gini calculations are regularly published and updated by international organizations and countries, including the OECDthe world Bankand the International Monetary Fund.
“Many countries use it, so you can get an internationally comparable measurement fairly quickly and easily,” says Webber.
What’s wrong with the Gini coefficient?
The Global Inequality Database, one of the world’s leading sources of data on income inequality with a network of researchers around the world, stays away from the Gini coefficient. The organization sees problems with any indicator that attempts to summarize inequality into a single number, according to Thomas Blanchet, an economist there.
On the Gini in particular, he and Webber of the ONS note some key issues:
- It is more sensitive to changes in the middle class, than for the extremes of rich or poor.
- The single figure provides very little detail about a country’s inequality
- It makes little sense on its own, without another context.
- It provides the same value for different manifestations of inequality.
- It is difficult to explain.
“The disadvantage of the Gini coefficient compared to other measures is that the number by itself does not necessarily mean a huge quantity… It’s only when you compare over time or with d ‘other countries you have an idea of what that means,” Webber says, “You can see a change in the Gini coefficient, but that doesn’t tell you much more than inequality has gone up or down. …Have the rich gotten richer, have the poorest gotten poorer?
Other ways to measure income inequality
One of the biggest problems with the Gini coefficient is simply that too many groups rely solely on the statistic. Other criteria may be more revealing.
Commonly used indicators include:
Income of the top 1%: The share of the total amount of income held by the top 1%.
P90/P10: The ratio of the income of the person at the top tenth percentile of the income distribution to the income of the person at the bottom tenth percentile. For USA this number is about six, which means that the lowest income of the 10% of the highest earning households is more than six times that of the highest income of the 10% of the lowest earning households.
S80/S20 ratio: Ratio between the cumulative income of the 20% of people who earn the most and the cumulative income of the 20% of people who earn the least.
Palma ratio: The ratio of the richest 10% of the population share in gross national income (GNI) divided by the share of the poorest 40%. As expected, middle-class incomes represent about half of a country’s GNI, with the other half split between the bottom 40% and the top 10%. A Palma ratio of 1, for example, means that the combined income of the top 10% and the bottom 40% are the same.
The Global Inequality Database prefers to compare the share of total income held by various groups; such as the top 1%, top 10%, middle 40%, and bottom 50%. “The idea is that if you know the share of these three or four groups, you basically have a pretty complete picture of what’s happening to inequality and you don’t really need to make it a single indicator,” explains Blanchet.
The ONS includes several measures beyond the Gini coefficient in his outings on income inequality. It’s “important to have a broader range of metrics,” Webber told Quartz, “to really give a fuller picture of what’s going on.”