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Income Inequality J. M. Pogodzinski
Income Inequality
J. M. Pogodzinski
Real Median Household Income 1984-2013
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Gini Coefficient
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Graphical representation of the Gini coefficient
The graph shows that the Gini coefficient is equal to the area marked A divided by the sum of the areas marked A and B. that is, Gini= A / (A + B). It is also equal to 2*A due to the fact that A+ B = 0.5 (since the axes scale from 0 to 1).
Gini Index
The Gini index is defined as a ratio of the areas on the Lorenz curve diagram. If the area between the line of perfect equality and the Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini index G = A / (A + B). Since A + B = 0.5, the Gini index is G = 2 A, or G = 1 – 2 B.
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Gini CoefficientExample
Percent of people Cumulative share of people Share of income Cumulative share of income Line of Equality
0 0 0 0 0
0.1 0.1 0.001 0.001 0.1
0.1 0.2 0.005 0.006 0.2
0.1 0.3 0.01 0.016 0.3
0.1 0.4 0.05 0.066 0.4
0.1 0.5 0.075 0.141 0.5
0.1 0.6 0.08 0.221 0.6
0.1 0.7 0.09 0.311 0.7
0.1 0.8 0.1 0.411 0.8
0.1 0.9 0.25 0.661 0.9
0.1 1 0.339 1 1
1 1
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Gini CoefficientExample Graph
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0
0.2
0.4
0.6
0.8
1
1.2
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Distribution of Income
Cumulative share of income Line of Equality
Gini Coefficient Example Modified
Percent of people Cumulative share of people Share of income Cumulative share of income Share of Income 2 Cumulative share of income 2 Line of Equality
0 0 0 0 0 0 0
0.1 0.1 0.001 0.001 0.0001 0.0001 0.1
0.1 0.2 0.005 0.006 0.0005 0.0006 0.2
0.1 0.3 0.01 0.016 0.001 0.0016 0.3
0.1 0.4 0.05 0.066 0.005 0.0066 0.4
0.1 0.5 0.075 0.141 0.0075 0.0141 0.5
0.1 0.6 0.08 0.221 0.008 0.0221 0.6
0.1 0.7 0.09 0.311 0.009 0.0311 0.7
0.1 0.8 0.1 0.411 0.01 0.0411 0.8
0.1 0.9 0.25 0.661 0.4 0.4411 0.9
0.1 1 0.339 1 0.5589 1 1
1 1 1
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Gini CoefficientExample Modified Graph
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0
0.2
0.4
0.6
0.8
1
1.2
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Distribution of Income
Cumulative share of income Line of Equality Cumulative share of income 2
What kinds of Gini Indexes are there?
• Income
– Households
– Families
• Wealth
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Gini Income Ratios
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Gini Coefficient – Various Countries
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2014 Gini Index - Worldwide
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TABLE 18.1 Distribution of Total Income and Components in the United States, 2006
(Percentages)
Households Total Income
Labor
Income
Property
Income
Transfer
Income
Bottom fifth 3.4 1.3 2.2 17.2
Second fifth 9.2 6.7 6.3 24.6
Third fifth 16.3 14.1 11.7 21.2
Fourth fifth 23.6 24.5 14.3 18.3
Top fifth 47.5 53.4 65.5 18.7
Top 1 percent 13.2 10.8 30.6 1.0
Income Inequality in the United States
In 2006, the top quintile earned 47.5 percent of total income while the bottom quintile earned just 3.4 percent. The top 1 percent (which is part of the top quintile) earned more than the bottom 40 percent. Labor income was less evenly distributed than total income.
TABLE 18.2 Distribution of Money Income of U.S. Households by Quintiles,
1967–2011 (Percentages)
1967 1975 1985 1995 2000 2009 2011
Bottom fifth 4.0 4.3 3.9 3.7 3.6 3.4 3.2
Second fifth 10.8 10.4 9.8 9.1 8.9 8.6 8.4
Third fifth 17.3 17.0 16.2 15.2 14.8 14.6 14.3
Fourth fifth 24.2 24.7 24.4 23.3 23.0 23.2 23.0
Top fifth 43.6 43.6 45.6 48.7 49.8 50.3 51.1
Top 5% 17.2 16.4 17.6 21.6 22.1 21.7 22.3
money income The measure of income used by the Census Bureau. Because money income excludes noncash transfer payments and capital gains income, it is less inclusive than economic income.
Changes in the Distribution of Income
Since 1975, there has been a slow but steady drift toward more inequality. During those years, the share of income going to the top 5 percent has increased from 16.4 percent to 22.3 percent while the share going to the bottom 40 percent has fallen from 14.7 percent to 11.6 percent.
Lorenz curve A widely used graph of the distribution of income, with
cumulative percentage of households plotted along the horizontal axis and
cumulative percentage of income plotted along the vertical axis.
Gini coefficient A commonly used measure of the degree of inequality of
income derived from a Lorenz curve. It can range from 0 to a maximum of 1.
The Lorenz Curve and the Gini Coefficient
FIGURE 18.2 Lorenz Curve
for the United States, 2009
The Lorenz curve is the most
common way of presenting
income distribution graphically.
If the distribution were equal, the
Lorenz curve would be the 45-
degree line 0A.
The larger the shaded area, the
more unequal the distribution.
The Lorenz Curve and the Gini Coefficient
TABLE 18.3 Mean Household Income Received by the Top, Middle, and Bottom Fifth
of Households in 2011
White (non-Hispanic) African-American Hispanic
Bottom 20% $ 12,691 $ 6,263 $ 9,194
Middle 20% 52,643 32,632 38,543
Top 20% 183,853 125,583 130,083
Top 5% 321,651 216,220 218,124
Differences Among African-American Households, White Households,
and Hispanic Households
In 2011, the bottom 20 percent of white households had a mean household
income that was twice that of the bottom 20 percent of African-American
households.
For the middle 20 percent of households, mean income for white households
was 61 percent higher than mean income for African-American households.
For Hispanics, the figure was 36 percent.
The top 5 percent of white households averaged $321,651 of income. For
African-Americans, it was $216,220; for Hispanics, $218,124.
TABLE 18.4 Income and Income per Capita Across the World in 2008
Population Gross National Income Per-Capita Income
Billions % Trillions of $ % (Dollars)
World 6.7 100 57.6 100.0 8,613
Low-Income Countries 1.0 15 0.5 1.0 524
Middle-Income Countries 4.6 70 15.2 26.0 3,260
High-Income Countries 1.1 15 42.0 73.0 39,345
The World Distribution of Income
When you look at total national income, the rich countries with 15 percent of
the population earn 73.0 percent of world income, while the poor countries with
15 percent of the population get only 1.0 percent of world income.
Data on the distribution of wealth are not as readily available as data on the
distribution of income.
The distribution of wealth is more unequal than the distribution of income.
Some argue that an unequal distribution of wealth is the natural and inevitable
consequence of risk taking in a market economy: It provides the incentive
necessary to motivate entrepreneurs and investors.
Others believe that too much inequality can undermine democracy and lead to
social conflict.
Many of the arguments for and against income redistribution apply equally well
to wealth redistribution.
The Distribution of Wealth
NEW BOOK
Thomas Piketty, Capital in the Twenty-First Century, Harvard University Press (2014)
