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Measuring economic inequality

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This excerpt is from the book chapter 'Measuring Economic Growth' by Robert Joyce, from Measuring the Economy, an online book by the Office for National Statistics edited by Jonathan Athow and Joe Grice. The whole chapter is available to read at the Measuring the Economy website.


What is economic inequality and why do we measure it?

Why are there many measures of inequality?

How do I decide which measure of inequality to use?

What if two measures of inequality show different patterns or trends?

Are all inequality measures reliable?

In 2011, Adbusters—a Canadian magazine that protests against what it believes to be the damaging effects of consumerism—called for a protest against the power of the US financial sector. On 17 September 2011, demonstrators massed in Zuccotti Park, close to Wall Street in New York City and refused to leave.

This was the beginning of the Occupy protest movement. Three weeks later, there were Occupy protests in 951 cities in 82 countries.

The protestors had many demands (and often disagreed among themselves), but their slogan articulated what they believed to be a fundamental unfairness in society: ‘We are the 99%’. This refers to the belief that the top 1% in society have a disproportionate share of power and influence, and that this power is growing. The explosion of the Occupy movement showed that this is a worry that is widely shared. This captures how unevenly distributed something is among a population. Economic inequality focuses on how key economic outcomes, such as income or wealth, are spread among the population has rarely been as prominent in public and political debate as it is now.

While aggregate measures such as GDP, national income and employment help understand how the overall economy is performing, they do not tell us how resources are distributed between the inhabitants of the country.

There are other statistics that claim to tell us how unequal we are as a society, and how this is changing. But what do these measures of inequality actually mean? How can one number tell you about the relative fortunes of tens of millions of people? These are two of the key questions that this chapter attempts to equip you to answer.

Measuring inequality is only one part of what is needed to make judgements about these questions, or to assess what—if anything—to do about them. For example, most people would want to know how an inequality has arisen in order to assess its fairness, and the inequality statistic itself will not tell you that.

Therefore understanding the measurement of inequality is not a narrow statistical issue:

  • Which types of inequality matter? Inequality measures implicitly incorporate many judgements that have nothing to do with statistical theory. The measurement is not (and should not be) divorced from the more fundamental judgements we have to make as a society. Different ways of measuring inequality are more or less appropriate, depending on precisely what it is you care about.
  • What is happening that is reflected in the trend? Trends in different measures of economic inequality can tell you a lot more if you view those statistics using some basic insights from economics.
  • Inequality is a complex concept. There are many ways of thinking about it and of measuring it. People might define it as the gap between rich and poor or, from a more statistically-minded respondent, the degree of dispersion in how well-off people are. There are at least two important follow-up questions in the context of creating statistics. First, how do we decide how rich, poor or well-off someone is? Inequality with respect to what, exactly? Second, how can we summarise the so-called gaps or degree of dispersion when we are talking about a comparison, not between two people, but very often, between millions? How do we weight what is going on at the bottom, middle and top to arrive at a simple statistic?

 

Deaton inequality website

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