1
Chapter 2: Measuring Inequality .........................................................................................................2
1. Diagnosing inequality ..................................................................................................................2
1.1. Inequality of what?...............................................................................................................2
1.1.1. Conceptual and policy issues..........................................................................................2
A) Income vs Consumption ..................................................................................................2
B) Values .............................................................................................................................3
1.1.2. Income ..........................................................................................................................3
A) Definition ........................................................................................................................3
B) An income accounting framework ...................................................................................3
C) A wealth accounting framework ......................................................................................4
1.2. Inequality among whom? .....................................................................................................4
1.2.1. Reference society ..........................................................................................................4
1.2.2. Individuals, families or households ................................................................................4
1.2.3 Equivalence scales ..........................................................................................................5
A) What? .............................................................................................................................5
B) Typology of equivalence scales ........................................................................................5
C) Comparing equivalence scales .........................................................................................7
D) Equivalence elasticities....................................................................................................8
E) Sensitivity of income estimates to different equivalence scales .......................................8
F) The impact of using different equivalence scales .............................................................9
1.3. Inequality across which time frame?.....................................................................................9
1.3.1. Short vs Long term view.................................................................................................9
1.3.2. Monthly vs Annual reference period ..............................................................................9
1.3.3. Cross section vs Dynamic analysis ................................................................................ 10
2. Measuring inequality................................................................................................................. 10
2.1. The Lorenz curve ................................................................................................................ 10
2.1.1. What?.......................................................................................................................... 10
2.1.2. Percentile ratio ............................................................................................................ 10
2.1.3. Income share ratios ..................................................................................................... 11
2.2. The Gini coefficient............................................................................................................. 11
3. Levels ........................................................................................................................................ 12
3.1. How unequal are our societies? .......................................................................................... 12
3.2. Comparing inequality measures.......................................................................................... 12
3.2.1. Gini and Palma............................................................................................................. 12
3.2.2. Gini and P90/P10 ......................................................................................................... 13
3.2.3. Gini and S80/S20 ......................................................................................................... 13
, 2
Chapter 2: Measuring Inequality
1. Diagnosing inequality
1.1. Inequality of what?
1.1.1. Conceptual and policy issues
A) Income vs Consumption
Income Consumption
Can fluctuate more than consumption Fluctuates less than income, which might make it a more
stable indicator of standard of living over time.
Can be seen as means to an end: Considers income not as an Can be used as a proxy for ‘permanent income’: People base
end in itself, but as a means to achieve other goals such as their spending decisions not on their current income, but on
purchasing goods and services, securing housing, and so on. their expected long-term income. Consumption is seen as a
Emphasizes that the value of income lies in what individuals better reflection of this 'permanent income' because it
can accomplish with it smooths out short-term fluctuations in income
But income goes much wider than its use for consumption: The observed level of inequality tends to be lower because
Income is often viewed not just as a measure of purchasing consumption smooths out short-term fluctuations in income:
power (consumption), but also as a broader indicator of • Spending decisions are made on expected long-term
economic opportunities, social status, and the ability to income (permanent income)
achieve personal and societal goals; Income impacts various • People can save or borrow money
aspects of individuals' lives beyond what they consume,
influencing their ability to save, invest, and participate in
economic and social activities.
What about wealth? (property, investments, savings, etc.) Consumer expenses vs Consumption: What is spent on goods
• Wealth is increasingly recognized as a crucial measure of and services vs Consumption patterns:
economic well-being and inequality. However, • Consumer expenses can include non-essential items or
comprehensive and reliable data on wealth distribution one-time expenditures that do not accurately reflect
remains limited. consumption patterns
• Leaves us with open conceptual issues, F. Ex. How do we • In case of market failures (f. ex. monopoly) , consumer
treat pension wealth? (accumulated savings and expenses might be higher than what typically is
investments set aside for retirement). F. Ex. Depending necessary to maintain a specified standard of living.
on the pension plan the calculation some individuals’ •
pension wealth will need a different approach than
others
Measurement issues:
• Including durable goods (such as cars or appliances) can
be challenging because their value depreciates over
time, and they do not represent ongoing consumption
expenditures.
• It is difficult to collect data on consumption patterns,
f. ex. the frequency of data collection, the reliability of
self-reported data, non-cash transactions or informal
economic activities.
Future research must analyze the joint distribution of income, consumption and wealth, how
they interact and jointly contribute to economic inequality and well-being.
Chapter 2: Measuring Inequality .........................................................................................................2
1. Diagnosing inequality ..................................................................................................................2
1.1. Inequality of what?...............................................................................................................2
1.1.1. Conceptual and policy issues..........................................................................................2
A) Income vs Consumption ..................................................................................................2
B) Values .............................................................................................................................3
1.1.2. Income ..........................................................................................................................3
A) Definition ........................................................................................................................3
B) An income accounting framework ...................................................................................3
C) A wealth accounting framework ......................................................................................4
1.2. Inequality among whom? .....................................................................................................4
1.2.1. Reference society ..........................................................................................................4
1.2.2. Individuals, families or households ................................................................................4
1.2.3 Equivalence scales ..........................................................................................................5
A) What? .............................................................................................................................5
B) Typology of equivalence scales ........................................................................................5
C) Comparing equivalence scales .........................................................................................7
D) Equivalence elasticities....................................................................................................8
E) Sensitivity of income estimates to different equivalence scales .......................................8
F) The impact of using different equivalence scales .............................................................9
1.3. Inequality across which time frame?.....................................................................................9
1.3.1. Short vs Long term view.................................................................................................9
1.3.2. Monthly vs Annual reference period ..............................................................................9
1.3.3. Cross section vs Dynamic analysis ................................................................................ 10
2. Measuring inequality................................................................................................................. 10
2.1. The Lorenz curve ................................................................................................................ 10
2.1.1. What?.......................................................................................................................... 10
2.1.2. Percentile ratio ............................................................................................................ 10
2.1.3. Income share ratios ..................................................................................................... 11
2.2. The Gini coefficient............................................................................................................. 11
3. Levels ........................................................................................................................................ 12
3.1. How unequal are our societies? .......................................................................................... 12
3.2. Comparing inequality measures.......................................................................................... 12
3.2.1. Gini and Palma............................................................................................................. 12
3.2.2. Gini and P90/P10 ......................................................................................................... 13
3.2.3. Gini and S80/S20 ......................................................................................................... 13
, 2
Chapter 2: Measuring Inequality
1. Diagnosing inequality
1.1. Inequality of what?
1.1.1. Conceptual and policy issues
A) Income vs Consumption
Income Consumption
Can fluctuate more than consumption Fluctuates less than income, which might make it a more
stable indicator of standard of living over time.
Can be seen as means to an end: Considers income not as an Can be used as a proxy for ‘permanent income’: People base
end in itself, but as a means to achieve other goals such as their spending decisions not on their current income, but on
purchasing goods and services, securing housing, and so on. their expected long-term income. Consumption is seen as a
Emphasizes that the value of income lies in what individuals better reflection of this 'permanent income' because it
can accomplish with it smooths out short-term fluctuations in income
But income goes much wider than its use for consumption: The observed level of inequality tends to be lower because
Income is often viewed not just as a measure of purchasing consumption smooths out short-term fluctuations in income:
power (consumption), but also as a broader indicator of • Spending decisions are made on expected long-term
economic opportunities, social status, and the ability to income (permanent income)
achieve personal and societal goals; Income impacts various • People can save or borrow money
aspects of individuals' lives beyond what they consume,
influencing their ability to save, invest, and participate in
economic and social activities.
What about wealth? (property, investments, savings, etc.) Consumer expenses vs Consumption: What is spent on goods
• Wealth is increasingly recognized as a crucial measure of and services vs Consumption patterns:
economic well-being and inequality. However, • Consumer expenses can include non-essential items or
comprehensive and reliable data on wealth distribution one-time expenditures that do not accurately reflect
remains limited. consumption patterns
• Leaves us with open conceptual issues, F. Ex. How do we • In case of market failures (f. ex. monopoly) , consumer
treat pension wealth? (accumulated savings and expenses might be higher than what typically is
investments set aside for retirement). F. Ex. Depending necessary to maintain a specified standard of living.
on the pension plan the calculation some individuals’ •
pension wealth will need a different approach than
others
Measurement issues:
• Including durable goods (such as cars or appliances) can
be challenging because their value depreciates over
time, and they do not represent ongoing consumption
expenditures.
• It is difficult to collect data on consumption patterns,
f. ex. the frequency of data collection, the reliability of
self-reported data, non-cash transactions or informal
economic activities.
Future research must analyze the joint distribution of income, consumption and wealth, how
they interact and jointly contribute to economic inequality and well-being.
