Measuring Inequality

Size distributions

Personal or size distribution deals with individual persons or households and the total incomes they receive.

Only accounts for how much each individual earns irrespective of other sources (interest, profits, rents…) or location (rural vs. urban) and occupational source (agriculture, or manufacturing.

Individuals are then placed in ascending order and grouped into quintiles (fifths) or deciles (tenths)

Shows what proportion of the national income is received by each group

A common measure of inequality is the Kuznets ratio

Measures the income received by the top 20% and the bottom 40% of the population

Another way is the Lorenz curve

A graph depicting the variance of the size distribution of income from perfect equality

Gini Coefficients and Aggregate Measures of Inequality

Gini coefficient: A numerical measure derived from the ratio of the area between the diagonal and the Lorenz curve divided by the total area of the half square in which the curve lies.

The coefficient lies between 0 (perfect equality) and 1(perfect inequality)

Highly unequal income countries are typically between

0.50 and 0.70. For example using 2016 World Bank data: Zambia (57.1), Panama (50.8), Honduras (49.8), Colombia (51.1)

Four properties

Anonymity principle: inequality does not depend on who

has the higher income.

Scale of independence: does not depend on the size of the economy or the way we measure income (dollars vs. euros.

Population independence: the measure of inequality should not be based on the number of income recipients.

Transfer principle: holding everything else constant, if we transfer money from a richer person to a poorer person, the resulting distribution will be more equal.

Measuring Absolute Poverty

Absolute poverty: the situation of being unable or only barely able to meet the subsistence essential of food, clothing, and shelter

Headcount index: Individuals whose incomes fall below the absolute poverty line (H) divided by total population (N). H / N

Total poverty gap: attempts to account for the generalize poverty of the headcount, by measure the total amount of income necessary to raise everyone who is below the poverty line up to that line.

Squared Poverty Gap Index: squares the poverty gap for each individual to put more emphasis on observations that fall far short of the poverty line rather than those that are closer.

Multidimensional Poverty Index

Absolute Poverty: Extent and Magnitude

The estimated number of people living on less than $1.25 a day was approximately 1.4 billion in 2005 (2010 World Development Indicators, World Bank)

Unevenly distributed: Southeast Asia accounts for 40%, and sub-Saharan Africa with 51%

Ultra-poverty: individuals who live on less than half of the 1.25 per day.

Differs from conventional poverty in depth, length of time, breadth (number of dimensions such as literacy and malnutrition)

Economic Characteristics of High-Poverty Groups

The magnitude of absolute poverty is the combination of low per capita incomes, and highly unequal distributions of the income

To formulate policies directed at attacking poverty, it’s important to know the characteristics of these groups

Rural Poverty

Generally the poor are located in rural regions / focused in agricultural activities / and are more often concentrate among minority ethnic groups and indigenous people

Women and Poverty

Women make up a substantial majority of the world’s poor

They are more likely to be poor, malnourished, and less likely to receive medical services, clean water, sanitation and other benefits.

Lower earning capacity, limited control over their spouses income, less access to education, formal-sector employment, social security and government employment programs are contributing factors.

Households headed by women are disproportionately among the ultra-poor

Studies on women vs. male distribution of wealth within the household

Programs designed to increase nutrition and family health are more effective when targeting women than when targeting men

Ethnic Minorities, Indigenous populations and Poverty

In developing countries, poverty falls heavily on ethnic minorities and indigenous populations

Amongst indigenous peoples, numbers exceed 300 million in over 5,000 different groups in more than 70 countries

40 percent of the worlds nation-states have more than five sizable ethnic populations

Being indigenous greatly increases the changes that an individual will be malnourished, illiterate, in poor health and unemployed

Policy options on income inequality and poverty: some basic considerations

Altering the functional distribution of income through relative factor prices

Mitigating the size distribution

Moderating (reducing) the size distribution at the upper levels

Progressive taxation of personal income and wealth

Increases government revenues and decreases the share of disposable income of the rich and with good policies can be invested into human capital / rural / or infrastructure needs

Moderating (increasing) the size distribution at the lower levels

Directly: raise the incomes of the poor either through conditional or unconditional cash transfers

Indirectly: through public employment creation of public infrastructure projects or provision of primary education and health care