A quantitative method for benchmarking fair income distribution

TL;DR

This paper introduces a new quantitative benchmark for fair income distribution based on principles from sports salary allocation, aiming to assess and guide fair income policies across countries.

Contribution

It proposes a novel method for benchmarking fair income distribution using concepts from sports fairness, addressing the challenge of measuring fairness in income inequality.

Findings

The benchmark can evaluate if a country's income shares align with fairness principles.

It demonstrates how to determine fair income shares using World Bank data.

The method aids in setting fair income targets for policy development.

Abstract

Concern about income inequality has become prominent in public discourse around the world. However, studies in behavioral economics and psychology have consistently shown that people prefer not equal but fair income distributions. Thus, finding a benchmark that could be used to measure fair income distribution across countries is a theoretical and practical challenge. Here a method for benchmarking fair income distribution is introduced. The benchmark is constructed based on the concepts of procedural justice, distributive justice, and authority's power in professional sports where it is widely agreed as an international norm that the allocations of athlete's salary are outcomes of fair rules, individual and/or team performance, and luck in line with no-envy principle of fair allocation. Using the World Bank data, this study demonstrates how the benchmark could be used to quantitatively gauge whether, for a given value of the Gini index, the income shares by quintile of a country are the fair shares or not, and if not, what fair income shares by quintile of that country should be. Knowing this could be useful for those involved in setting targets for the Gini index and the fair income shares that are appropriate for the context of each country before formulating policies toward achieving the Sustainable Development Goal 10 and other SDGs.