Hi everyone,
I'm aware that the Gini index is the most widely used measure of income inequality, but in my search for other alternative measures, I came across the 'Palma ratio' which is defined as "the ratio of national income shares of the top 10% of households to the bottom 40%. If the richest 10% in a country earn between them half of the national income, and the poorest 40% earn one-tenth of the national income, the Palma ratio is 0.5 divided by 0.1, which is 5". It reflects an observation of Chilean economist José Gabriel Palma about the stability of the “middle” 50% share of income across countries.
I'm still not clear about this measure, but will it reflect the disparity in the income distribution within an economy?
Opinions and contributions will be greatly appreciated.
Thank you.
Ngozi
Any distribution (even discrete, like income of 10%, 20%, ...90%) is always more informative than functional - one number. If we compare functionals (mapping of distribution into 1 number), I would prefer the ratio of income of top 10% to bottom 10%(let us name it T10/B10). In your case (Palma) bottom 10% are replaced by bottom 40%; let us name it T10/B40. Is this measure better or not, depends on country. Some countries with social protection (like Austria) have relatively few poor, and then it is important to know how poor are those 10%. In 1970s there was a study of T10/B10: in the USSR it was about 3, while in UK only 4, and in the USA only 6. That was a period of high social equality globally. After 1990 it has risen in Russia to 15, and in US it grew in 2013 to 18.8 (with Gini only 0.4), and well above in Latin America. Data about different countries in 2012 are given here: http://www.oecd.org/social/income-distribution-database.htm Now OECD average is 9.6, the lowest inequality (5.2) is in Denmark, the highest among given countries (30.5) is in Mexico. For the same country set Gini ranges only between 0.25 and 0.50.
If we would use Gini, the difference is much less informative: Gini=0.4 is already for high T10/B10>10, while Gini=0.3 corresponds to much higher equality like 6-7. Palma will give less sharp values than T10/B10 (unless bottom 40% are equally poor). But it might be good indicator for some African countries, where quite often bottom 50% live on $2 per day.
It is also important to track what fraction is hold by top 1%, because the main global dynamics today is in wealth movement from middle class to top 1%.
Interesting. I´m working with inequality income (With Gini of coruse) for indigenous areas in Mexico, what are you working in?
Thanks Prof. Yegorov, your clear explanation on the dynamics of the Palma ratio makes it an interesting measure of inequality worth using. I'll definitely employ it as a robustness check on the Gini index... thanks again for the clarity of explanation!
...and Miguel, I'm working on income inequality in Nigeria (time series analysis) and in Sub-Saharan Africa (panel data analysis). I intend analysing how financial reforms can help in reducing the inequality gap. Using the Palma ratio alongside the Gini index will definitely make an interesting study and shed more light on the research problem.
Ngozi
Dear Ngozi,
actually I was talking about the dynamics of T10/B10 index, not Palma. But it is closer to Palma than to Gini. Gini is an integral, it measures overall different between equal distributions. And it is not so pronounced: if we give all wealth to 1 person, and 0 to the rest, Gini will be only 1. In this case however both T10/B10 and Palma will be not so informative. For different countries the policies differ, so the best index may differ. Do we care about the most poor 10% or overall level of poverty in 40% poorest - then you should use either T10/B10 or T10/B40 (Palma).
Prof. Yegorov, I understand you perfectly... but does the T10/B10 have a name or I can call it Yeg-index after you? Reason is I really want to use another inequality measure alongside the Gini index... and since you're so grounded on the T10/B10 index, I'll be consulting you as I progess in my research... thanks a lot!!!
Dear Ngozi, it is not my invention. Those measures were used by Atkinson and Micklewright, at least I saw in their book:
Atkinson, A.B. and J. Micklewright (1992), Economic Transformation in Eastern Europe and the Distribution of Income. Cambridge: Cambridge University Press.
But there is long name, like the "income ratio of top10% to bottom 10 %". Here you can see the discussion about different ratios in UK: https://www.equalitytrust.org.uk/scale-economic-inequality-uk
Hi Kehinde,
I'm sorry for my late response....and I'm glad you have the Palma ratio dataset. Will you be kind enough to avail same to me?, cos I don't have it.
...and if you don't mind, can we collaborate on some studies?
Thanks.
Hello Ngozi,
It's no problem at all. I will be willing to avail you that. Could you send me your email so we could chat better on the studies proposed.
Cheers.