A simple method for measuring inequality

TL;DR

This paper introduces a new inequality index combining the Gini index with income shares of the top and bottom 10%, providing a more nuanced measure of income inequality across countries and over time.

Contribution

It proposes a novel inequality index that overcomes limitations of existing measures by integrating multiple indicators for a comprehensive assessment.

Findings

The index differentiates countries with similar Gini but different income gaps.

It captures inequality dynamics not visible through the Gini index alone.

Applicable to other disciplines as a measure of heterogeneity.

Abstract

To simultaneously overcome the limitation of the Gini index in that it is less sensitive to inequality at the tails of income distribution and the limitation of the inter-decile ratios that ignore inequality in the middle of income distribution, an inequality index is introduced. It comprises three indicators, namely, the Gini index, the income share held by the top 10%, and the income share held by the bottom 10%. The data from the World Bank database and the Organization for Economic Co-operation and Development Income Distribution Database between 2005 and 2015 are used to demonstrate how the inequality index works. The results show that it can distinguish income inequality among countries that share the same Gini index but have different income gaps between the top 10% and the bottom 10%. It could also distinguish income inequality among countries that have the same ratio of income share held by the top 10% to income share held by the bottom 10% but differ in the values of the Gini index. In addition, the inequality index could capture the dynamics where the Gini index of a country is stable over time but the ratio of income share of the top 10% to income share of the bottom 10% is increasing. Furthermore, the inequality index could be applied to other scientific disciplines as a measure of statistical heterogeneity and for size distributions of any non-negative quantities.