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Income inequality, always with us, captured extra attention during the financial crisis of 2007-09. Although it’s traditionally been viewed as a socioeconomic issue, many organizations have begun to utilize it for everything from sales and marketing to community service. There are several statistical methods used to measure income inequality:
Gini coefficient. The Gini, named for an Italian sociologist, is the most common gauge of income inequality. A Gini of 0 means every household has the same income; a Gini of 1 means that one household has all the income. The Gini is based on the Lorenz curve, which plots the percentage of total income earned by the cumulative percentages of the population.
Theil Index. The Theil ranges from 0 to infinity. A Theil of 0 means perfect equality; an infinite index number represents perfect inequality. Like the Gini, the Theil represents the distance of a given population from perfect equality.
Palma Ratio. The Palma focuses on extreme income levels. It’s calculated by dividing the richest 10 percent of a population’s share of gross national income by the poorest 40 percent of a population’s share. It generally assumes that middle-income shares are stable and focuses instead on extremes.
Atkinson Index. The Atkinson is considered useful for determining which end of the economic spectrum is contributing most to income inequality. For example, an Atkinson of 0.2 implies that the same level of social welfare could be achieved with only 80 percent (1–0.2) of income.
Income Quintile/Decile Ratios. These are among the simplest measures of inequality, comparing the incomes of the top 20 percent (or 10 percent for a decile) to the incomes of the bottom 20 percent (or 10 percent for a decile).
Robin Hood Index. Also known as the Hoover Index, the Robin Hood is simply the percentage of total income that would need to be redistributed to achieve perfect equality.
These measures provide different perspectives on income inequality and are often used in combination to give a more comprehensive picture of income distribution within a country or region.
