| Income Inequality |
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Absolute income criteria Absolute measures define a minimum standard, then calculate the number (or percent) of individuals below this threshold. These methods are most useful when determining the amount of Poverty in a society. Examples include:
I where: P N B A Relative income criteria ]] Relative income measures compare the income of one individual (or group) with the income of another individual (or group). These measures are most useful when analyzing the scope and distribution of income inequality. Examples include:
Defining income Both of the above measures use income as the basis for evaluating poverty. However, 'income' is here understood different than a common understanding: It means the total amount of goods and services that a person receives, and thus there is not necessarily money or cash involved. If a poor subsistence farmer in Uganda grows her own grain it will count as income. Services like public health and education are also counted in. Often expenditure or consumption (which is the same in an economic sense) is used to measure income. The World Bank uses the so-called Living Standard Measurement Surveys ( LSMS ) to measure income. These consist of questionaires with 200+ questions. Surveys have been completed in most developing countries. Criticisms of income inequality metrics # It is not clear how income should be defined. Should it include capital gains, imputed house rents from home ownership, and gifts? If these income sources are ignored (as they often are), how might this bias the analysis? How should non-paid work (such as parental childcare) be handled? Wealth or consumption may be more appropriate measures in some situations. Broader Metrics Of Human Well-being might be useful. # Should the basic unit of measurement be households or individuals? The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. The metrics will be biased either upward or downward depending on which unit of measurement is used. #These income inequality metrics ignore life cycle effects. In most Western societies, an individual tends to start life with little or no income, gradually increase income till about age 50, after which incomes will decline, eventually becoming negative. This will have the effect of significantly overstating inequality. It has been estimated (by A.S. Blinder in ''The Decomposition of Inequality'', MIT press) that 30% of measured income inequality is due to the inequality an individual experiences as they go through the various stages of life. #Should real or nominal income distributions be used? What effect will inflation have on absolute measures? Do some groups (eg., pensioners) feel the effect of inflation more than others? #How do we allocate the benefits of government spending? How does the existence of a social security safety net influence the definition of absolute measures of poverty. Do government programs support some income groups more than others? #Income inequality metrics are seldom used to quantify and examine the causes of income inequality. Some alleged causes include: life cycle effects (age), inherited characteristics (IQ, talent), willingness to take chances (risk aversion), the leisure/industriousness choice, inherited wealth, economic circumstances, education and training, discrimination, and market imperfections. These criticisms help to understand the problems caused by the improper use of inequality measures. However, they do not render inequality coefficients invalid. If inequality measures are computed in a well explained and ''consistent'' way, they can provide a good tool for quantitative ''comparisons'' of inequalities at least within a research project. See also
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