A Better Yardstick for Measuring Inequality

Just 85 of the world’s billionaires, the anti-poverty group Oxfam reported earlier this year, hold as much wealth as the entire bottom half of the world’s population, 3.5 billion people in all.

Seven of every ten people on earth today, Oxfam added, live in nations where inequality has jumped since the 1980s. Our richest global 1 percent currently own a whopping 46 percent of the world’s wealth.

We can’t blame Corrado Gini for this incredibly extreme global divide. He never set out to create inequality. He just tried to measure it.

This eminent Italian sociologist once ranked as one of the world’s premiere statisticians. Almost exactly a century ago, he developed what would become the most widely accepted default statistic for measuring inequality, a yardstick now commonly known as the “Gini coefficient.”

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.

The abstract Gini numbers mean nothing to the general public.

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?

On questions like these, note inequality-watchers Andy Sumner and Alex Cobham, “the Gini won’t be a great deal of help.”

Sumner, the co-director of the International Development Institute, and Codham, a Center for Global Development researcher, have been beating the drums for a new inequality yardstick based on the work of Gabriel Palma, a Chilean economist now based at Cambridge University.

In almost every society, Palma’s research shows, the income share of people who make less than the most affluent 10 percent and more than the poorest 40 percent tends to remain fairly stable. Substantial shifts in income share typically only turn up in that top 10 and bottom 40.

The income share of people who make less than the most affluent 10 and more than the poorest 40 percent tends to remain stable.

The “Palma ratio” addresses this volatility at the edges by defining 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.

Nobel Prize-winning economist Joseph Stiglitz has just added to this growing push for the Palma yardstick. In a new co-authored paper, he’s asking world leaders to add a new ninth goal — eliminating extreme inequality — to the eight adopted at the UN Millennium Summit in September 2000.

Top-heavy income distributions, 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.”

Sign-up for Too MuchStiglitz and Doyle, a former UN assistant secretary-general, suggest a specific target for ending these top-heavy distributions. By the year 2030, the two analysts advise, all nations should have their top 10 percents taking in no more income than their bottom 40 percents, a Palma ratio of just 1.

Scandinavian nations already at or near this Palma ratio level, the pair adds, are benefiting from an “equality multiplier” that has left them not just more “equitable and stable” economically but more “efficient and flexible” as well.

“Sustainable development,” Stiglitz and Doyle sum up, “cannot be achieved while ignoring extreme disparities.”

And shoving Gini aside for Palma might make that ignoring all the harder.

Want to learn more about Palma ratios? Check this two-minute video.