Measuring and Addressing Income Inequality and Poverty
Measuring Inequality
Size Distributions
Personal or size distribution examines income distribution among individuals or households. It focuses solely on individual earnings, disregarding other income sources like interest, profits, rents, or factors like location (rural vs. urban) and occupation (agriculture, manufacturing, etc.).
Individuals are ranked by income and categorized into quintiles (fifths) or deciles (tenths) to illustrate the proportion of national income each group receives.
Kuznets Ratio
The Kuznets ratio is a common inequality measure that compares the income of the top 20% to the bottom 40% of the population.
Lorenz Curve
The Lorenz curve visually represents income distribution, illustrating the deviation from perfect equality.
Gini Coefficients and Aggregate Measures of Inequality
Gini coefficient: Derived from the Lorenz curve, this numerical measure represents the ratio of the area between the diagonal and the Lorenz curve to the total area of the half-square containing the curve.
The coefficient ranges from 0 (perfect equality) to 1 (perfect inequality). Highly unequal countries typically fall 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 of Inequality Measures:
- Anonymity principle: Inequality is not determined by who earns the higher income.
- Scale independence: Inequality is independent of the economy’s size or the currency used (dollars vs. euros).
- Population independence: Inequality measurement should not rely on the number of income recipients.
- Transfer principle: Assuming all else remains constant, transferring income from a richer to a poorer person results in a more equal distribution.
Measuring Absolute Poverty
Absolute poverty refers to the inability or extreme difficulty in affording basic necessities like food, clothing, and shelter.
Poverty Measures:
- Headcount index: Calculated as the number of individuals below the poverty line (H) divided by the total population (N): H/N.
- Total poverty gap: This measure considers the overall poverty level by calculating the total income needed to lift everyone below the poverty line up to that line.
- Squared Poverty Gap Index: This index squares the poverty gap for each individual, emphasizing those furthest below the poverty line.
- Multidimensional Poverty Index: This index captures poverty across various dimensions.
Absolute Poverty: Extent and Magnitude
In 2005, an estimated 1.4 billion people lived on less than $1.25 a day (2010 World Development Indicators, World Bank). This poverty is unevenly distributed, with Southeast Asia accounting for 40% and sub-Saharan Africa for 51%.
Ultra-poverty refers to individuals living on less than half of $1.25 per day. It differs from conventional poverty in its severity, duration, and breadth (encompassing dimensions like literacy and malnutrition).
Economic Characteristics of High-Poverty Groups
High poverty rates result from a combination of low per capita incomes and unequal income distribution. Understanding the characteristics of high-poverty groups is crucial for developing effective poverty reduction policies.
Rural Poverty
Poverty is often concentrated in rural areas, particularly among those engaged in agriculture and belonging to minority ethnic groups or indigenous populations.
Women and Poverty
Women constitute a significant majority of the world’s poor. They face higher risks of poverty, malnutrition, and limited access to healthcare, clean water, sanitation, and other essential services.
Contributing factors include lower earning capacity, limited control over spousal income, and reduced access to education, formal employment, social security, and government programs. Female-headed households are disproportionately represented among the ultra-poor.
Studies highlight gender disparities in household wealth distribution. Programs targeting women for improved nutrition and family health have proven more effective than those targeting men.
Ethnic Minorities, Indigenous Populations, and Poverty
Ethnic minorities and indigenous populations are disproportionately affected by poverty in developing countries. Indigenous communities comprise over 300 million people across 5,000 groups in more than 70 countries. 40% of nation-states have at least five significant ethnic groups.
Indigenous populations face a higher likelihood of malnutrition, illiteracy, poor health, and unemployment.
Policy Options on Income Inequality and Poverty: Basic Considerations
Altering the Functional Distribution of Income
Adjusting relative factor prices can influence income distribution.
Mitigating the Size Distribution
Moderating (Reducing) the Size Distribution at the Upper Levels
- Progressive taxation: Taxing personal income and wealth progressively increases government revenue and reduces the disposable income share of the wealthy. Effective policies can channel these resources towards human capital development, rural areas, and infrastructure.
Moderating (Increasing) the Size Distribution at the Lower Levels
- Directly: Increase incomes of the poor through conditional or unconditional cash transfers.
- Indirectly: Create public employment opportunities, invest in public infrastructure, or provide primary education and healthcare.