Teaching Comparative Government and Politics

Friday, March 13, 2015

The Gini Index

Here's one to save for your introduction of methods of measuring income inequalities and asking how those factors influence government and politics.

The Gini Index will be around in textbooks and exams for some time to come, but Palma might show up in unexpected places, so students should be ready to respond appropriately to both.

Who, What, Why: What is the Gini coefficient?

When Italian statistician... Corrado Gini died in Rome on 13 March 1965, he could not have known that 50 years on, the UN would still use his name in their annual rankings of nations.

"The Gini coefficient provides an index to measure inequality," says Antonio Cabrales, a professor of economics at University College London.

It is a way of comparing how distribution of income in a society compares with a similar society in which everyone earned exactly the same amount. Inequality on the Gini scale is measured between 0, where everybody is equal, and 1, where all the country's income is earned by a single person…

"The Gini has been around for a very long time, and it's very technically sound if you want to measure income inequality across the whole population," explains Andy Sumner, director of the International Development Institute at Kings College, London. "But one might say the Gini is oversensitive to changes in the middle, and undersensitive at the extremes."

The coefficient doesn't capture very explicitly changes in the top 10% - which has become the focus of much inequality research in the past 10 years - or the bottom 40%, where most poverty lies. As a result, Sumner and colleague Alex Cobham put forward an alternative - the Palma ratio - which does.

"We tried to come up with a measure more sensitive to changes at the top which people are more interested in, and which is more intuitive," says Sumner. If the richest 10% of the population has five times the income of the bottom 40%, a country's Palma ratio is 5.

The idea is picking up steam. The Palma ratio has since been listed in the OECD rankings of countries' inequality, and in annual UN Human Development reports, alongside the Gini. Whether Corrado Gini's coefficient will last another half century is uncertain.

A Better Yardstick for Measuring Inequality

We always get what we measure. And if we measure inequality with a yardstick that only wonks can decipher, we’ll end up with a society too confused about inequality to do anything meaningful about it…

In Gini’s formulation, a society where one person grabbed all the income would have a value of one. A society with all income shared absolutely evenly would have a value of zero.

No nation, of course, has ever had either absolute income equality or absolute income concentration. Most nations end up with Gini numbers like 0.57, the Gini rating for the United States last year, or 0.49, the Gini for Japan.

These numbers tell statisticians a great deal. A rise or fall of a mere 0.1 in Gini values can be a big deal and signify a major change in income distribution. But these abstract numbers mean nothing to the general public and, consequently, essentially do nothing at all to raise inequality’s political profile.

The Gini numbers have other problems as well. Gini ratings say a good bit about a society’s overall level of inequality, but offer no clue about what’s driving changes in that level. Are the rich grabbing more or less of the income pie? Are the poor losing ground? Or households in the middle?…

The “Palma ratio” [defines]… income inequality as a ratio between the top 10 and bottom 40. In a society with a Palma ratio of 4, the top 10 percent is grabbing four times the income of the bottom 40 percent.

This simple relationship gives every Palma ratio figure a readily understandable meaning. In a society where the Palma ratio has gone from 2 to 3, households in the top 10 percent have gone from making double the income of that society’s poorest 40 percent to making triple the bottom 40′s income share.

Last March 90 noted social scientists urged a key UN economic development panel to place the Palma ratio front and center. The top 10-bottom 40 inequality that Palma stats measure, they argued, really matters. Nations with shrinking Palma ratios, as researchers have detailed, turn out to be three times better at reducing extreme poverty and hunger than nations with rising Palma ratios…

Top-heavy income distributions, Nobel Prize-winning economist Joseph Stiglitz and his colleague Michael Doyle observe, “undermine both political equality and social stability” and generate chronic underinvestment in infrastructure, education, and other public goods that make for “long-term economic prosperity.”…

The following includes a link to a video explaining the Palma ratio.

How the world’s countries compare on income inequality (the U.S. ranks below Nigeria)

The way we measure income inequality is changing. After years of relying on a complicated metric called the Gini coefficient, some economists argue that we should adopt the Palma ratio, which measures the gap between the rich and the poor in a society…

In the map up top, I've illustrated the latest data on income inequality around the world, as measured by the Palma. The results are pretty revealing. Bluer countries have greater income equality, according to the metric, meaning that there's less of a gap between the rich and the poor. Redder countries have more income inequality, meaning that there's a wider gap. Purple countries are about in the middle -- that includes the United States, which is the most unequal of any developed country measured.

The countries that come out looking best include, no surprise, the usual suspects of Northern Europe. Interestingly, Eastern Europe scores quite highly as well, as do some post-Soviet countries in Central Asia. Perhaps that's a legacy of Soviet-era social programs meant to flatten class divides. But it's also a reminder that, while economic equality is great, it's not synonymous with a healthy economy. Some countries are economically equal because everyone is well-off, as in Denmark, and some because most everyone is equally poor.