Gini coefficient: The famous, and flawed, measure of income inequality

Unequal measures when measuring inequality In 2015, Greece, Thailand, Israel, and the UK were equally unequal. That is, all four countries had the same Gini coefficient, a common measure of income inequality. The number suggests that the spread of incomes in the four nations was the same. However, a close look at the poorest and wealthiest in those societies reveals a very different picture. The ratio between income held by the richest 10% and the poorest 10% ranged significantly, from 13.8 in Greece to 4.2 in the UK. The fact is, just because the Gini coefficient is so well known doesn’t mean it’s a particularly useful measurement. Its appeal comes from its simplicity—a number between 0 and 1 that can encapsulate a complex distribution in a single figure—as well as its popularity. It is also regularly published and updated by powerful international organizations like the [OECD](, the [World Bank](, and the [International Monetary Fund](. However, it has a number of serious limitations. So many, in fact, that the [World Inequality Database](, one of the world’s leading sources of income inequality data, steers clear. And it’s not alone. While [some economists]( defend the Gini coefficient’s continued use, most agree that as a way to understand income inequality, it’s insufficient on its own. Let’s get calculating. 🐦 [Tweet this!]( 🌐 [View this email on the web]( Sponsored by [Quartz Weekly Obsession] Gini coefficient June 16, 2021 Unequal measures --------------------------------------------------------------- In 2015, Greece, Thailand, Israel, and the UK were equally unequal. That is, all four countries had the same Gini coefficient, a common measure of income inequality. The number suggests that the spread of incomes in the four nations was the same. However, a close look at the poorest and wealthiest in those societies reveals a very different picture. The ratio between income held by the richest 10% and the poorest 10% ranged significantly, from 13.8 in Greece to 4.2 in the UK. The fact is, just because the Gini coefficient is so well known doesn’t mean it’s a particularly useful measurement. Its appeal comes from its simplicity—a number between 0 and 1 that can encapsulate a complex distribution in a single figure—as well as its popularity. It is also regularly published and updated by powerful international organizations like the [OECD](, the [World Bank](, and the [International Monetary Fund](. However, it has a number of serious limitations. So many, in fact, that the [World Inequality Database](, one of the world’s leading sources of income inequality data, steers clear. And it’s not alone. While [some economists]( defend the Gini coefficient’s continued use, most agree that as a way to understand income inequality, it’s insufficient on its own. Let’s get calculating. 🐦 [Tweet this!]( 🌐 [View this email on the web]( By the digits 1: A Gini coefficient of 1 means the population has complete inequality, while a 0 means complete equality. In reality, populations fall somewhere between these numbers. [0.48:]( The Gini coefficient for Costa Rica is the highest of the OECD countries, suggesting it has high income inequality [0.39:]( The Gini coefficient for the US is fifth highest of the 37 OECD countries [0.24:]( The Slovak Republic has the lowest Gini coefficient of the OECD countries, suggesting it has relatively low income inequality [43%:]( Share of the world’s wealth held by the richest 1% [26:]( Number of billionaires in 2019 that held the same amount of wealth as the world’s poorest 50% [29%:]( Share of Sweden’s national income held by the wealthiest 10%, one of the lowest in the world Charted The Gini coefficient and the Lorenz curve --------------------------------------------------------------- The Gini coefficient, sometimes referred to as the Gini index, builds on work by American economist Max Lorenz, who figured out a way to chart the distribution of income in a population. Building upon that work, Italian Corrado Gini developed his coefficient and [introduced]( it to the world in 1912. Sponsored by Code42 What is Insider Risk? --------------------------------------------------------------- The files employees upload, download, email, and Slack every day may be leaving your organization—and you don’t even know it.[Here's what to do.]( Million-dollar question So, what’s the problem? --------------------------------------------------------------- There are a number of reasons it’s statistically unsavvy to use the Gini coefficient by itself when talking about income inequality. First, it’s hard to explain. And the 0-to-1 figure alone doesn’t tell you anything about the nature of the inequality. Different breakdowns of wealth in a country—different distributions—can have the same Gini coefficient. The number is also more sensitive to changes in the middle class than for the extremes of rich or poor. Here are some information-rich alternatives to use when talking about income inequality. 💰 Income of the top 1%: The share of the total amount of income held by the top 1% of earners. 💰 P90/P10: The ratio of the income of the person at the top tenth percentile of the income distribution to the income of the person at the bottom tenth percentile. 💰 S80/S20: The ratio of the cumulative income of the highest earning 20% of people to the cumulative income of the lowest earning 20%. 💰 The Palma ratio: The ratio of the richest 10% of the population’s share of the gross national income divided by the share of the poorest 40%. Giphy Explain it like I’m 5! We treasure what we measure --------------------------------------------------------------- Historically, most economists haven’t been particularly [interested in inequality](, largely because theories like [trickle down economics](, and the [Kuznets curve](—which makes the case that inequality is a normal part of development, and economies naturally grow out of it over time—minimize its importance. Neither of those theories, it turns out, actually work in reality. Further enriching the already rich does not trickle down to help the poor, and economies don’t always become more equitable on their own. Equity relies on policy. Policy relies on data, or should, at least in part. Being able to measure, even imperfectly, a big concept like inequality, helps ground [debate in how to address]( it in fact rather than opinion. In theory, of course. Quotable “Let’s use multiple measures of the [income] distribution; but if you’re going to use just one, please don’t let it be the Gini.” —Alex Cobham, one of the researchers who proposed the [Palma ratio]( Pop quiz In the US, what is the share of household wealth held by the top 1%? 11%31%21%41% Correct. That’s right. In 2020, the richest 1% of people in the US held nearly a third of the country’s household wealth. And if we widen our scope to the top 10%, that household income number more than doubles to 69%. Incorrect. If your inbox doesn’t support this quiz, find the solution at bottom of email. Fun fact! The Gini coefficient can measure any sort of inequality in a frequency distribution, meaning it can be used to measure disparities beyond just income and wealth. Researchers have used it to study malaria, traffic concentration, and discrimination in credit risk management. Person of Interest Maybe don't dream of Gini --------------------------------------------------------------- Corrado Gini was a well-known statistician who, beyond developing the Gini coefficient, eventually became the founding director of the Italian National Institute of Statistics. Despite his successes, however, he is not remembered fondly. Apparently some Italian economists [won’t even say his name](. Gini worked uncomfortably closely with Benito Mussolini. He rationalized many of the dictator’s actions, was a eugenicist, and is the author of a paper called “The scientific basis of fascism.” In 1944, he was [investigated]( for his role in Mussolini’s regime, but in the end, he was only briefly suspended from academic work. take me down this 🐰 hole! Palma ratio --------------------------------------------------------------- One problem with the Gini coefficient is that it isn’t particularly sensitive to changes at either end of the curve—those with the most and least amount of wealth. That’s an issue because, argued Chilean economist José Gabriel Palma, it’s not in the middle class where the income disparities occur between countries. He discovered that the middle 50% of the population tends to consistently get 50% of a country’s total income. The rest is split between the richest 10% and the poorest 40%, but the share of those two groups varies quite a bit between nations. So, academics addressed this Gini shortcoming by developing [the Palma ratio](, which measures the richest 10% of the population’s share of the gross national income divided by the share of the poorest 40%. The measurement has been around for less than a decade, but has already become a popular alternative to the Gini; many national statistics agencies, as well as international organizations like the World Bank and the UN, report on it. Poll Should we put the Gini back in its bottle? [Click here to vote]( Get rid of it. It’s a meaningless measure and it distracts from more useful statistics.Keep it. The more ways to talk about income inequality the better. 💬let's talk In last week’s poll about [Swiss Army knives](, 66% of you said that a Swiss Army knife is the most useful tool, 23% voted for an elephant’s trunk, and 11% of you would rather have an AR-15 in your pockets. 🤔 [What did you think of today’s email?](mailto:obsession%2Bfeedback@qz.com?cc=&subject=Thoughts%20about%20Swiss%20Army%20knives&body=) 💡 [What should we obsess over next?](mailto:obsession%2Bideas@qz.com?cc=&subject=Obsess%20over%20this%20next.&body=) [🎲 Show me a random Obsession]( Today’s email was written by [Amanda Shendruk](, edited by [Annaliese Griffin](, and produced by [Jordan Weinstock](. [facebook]([twitter]([external-link]( The correct answer to the quiz is 31%. Enjoying the Quartz Weekly Obsession? [Send this link]( to a friend! Want to advertise in the Quartz Weekly Obsession? Send us an email at ads@qz.com. Not enjoying it? No worries. [Click here]( to unsubscribe. 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