Measures of inequality - how much are we willing to allow top earners to squeeze the poor?

 
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24 April 201

KEY FINDINGS

* The majority of income inequality occurs at the tails of the income distribution

* The Gini coefficient does not provide a representative measure of income inequality

* When the top 10% of income earners expand their share of national income it often appears to be to detriment of the poorest 40%

* Available data suggests that the top 10% of income is itself unevenly distributed between the top 5% and the second higher-earning 5% of the population

Inequality higher than ever

Since the financial crisis of 2008, policy makers and economists have grown more concerned with the issue of income inequality. Recent studies have shown that income and wealth inequality has been on the rise and is higher than ever in many developing and developed countries. The CEOs of large multinational corporations can earn as much as 653 times the salary of their employees and the world's richest 85 individuals own more than the bottom three billion, according to a study by Oxfam.

Although there seems to be an intrinsic social aversion to such extreme levels of inequality, reactions have not quite been as strong one would expect. One likely culprit for this muted reaction is the incomplete insight provided by the Gini coefficient--the prevailing measure of inequality--which focuses on changes in the middle of the distribution, not at the extremes, where most of these changes seem to take place.

Perspectives on inequality

The traditional model of income inequality, Kutznets' curve, argues that inequality increases in the initial phase of development as wage differentials between skilled and unskilled workers increase, only to decrease after a certain level of development has been reached and the ratio of skilled-to-unskilled workers decreases. To this school of thought, inequality is not necessarily undesirable. It is the result of different skills and productivity and thus serves as a motivation for skills upgrading, increased productivity, and thus development.

Contrarily to this however, what has been described as the new school considers inequality to be undesirable because it is negatively correlated with economic growth. This is blamed on the unproductive expenditure of the rich, persistence of low levels of human capital and political disenfranchisement and instability.

Three factors have contributed to the rise of the second group of scholars. Firstly, much of the burden of the economic adjustment after the financial crisis seems...

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