Income inequality metrics
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{{Main|Coefficient of variation}} |
{{Main|Coefficient of variation}} |
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Coefficient of variation (CV) used as a measure of income inequality is conducted by dividing the standard deviation of the income (square root of the variance of the incomes) by the mean of income. Coefficient of variation will be therefore lower in countries with smaller standard deviations implying more equal income distribution. |
[[Coefficient of variation]] (CV) used as a measure of income inequality is conducted by dividing the standard deviation of the income (square root of the variance of the incomes) by the mean of income. Coefficient of variation will be therefore lower in countries with smaller standard deviations implying more equal income distribution. |
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It has the advantages of being mathematically tractable and its square is subgroup decomposable, but it is not bounded from above. This simple form of measurement is not being commonly used mostly for its two considerable limitations. The first one could be attributed to CV not having and upper limit, unlike the Gini coefficient, therefore causing difficulties with interpretation and comparison. Secondly, as the mean and standard deviation may be heavily affected by anomalous borderline values, the coefficient would not be an appropriate choice of income inequality measure for a case of abnormal data distribution.{{Cite journal |last=Trapeznikova |first=Ija |date=2019-07-17 |title=Measuring income inequality |url=https://wol.iza.org/articles/measuring-income-inequality/long |journal=IZA World of Labor |language=en-US |doi=10.15185/izawol.462|doi-access=free }} |
It has the advantages of being mathematically tractable and its square is subgroup decomposable, but it is not bounded from above. This simple form of measurement is not being commonly used mostly for its two considerable limitations. The first one could be attributed to CV not having and upper limit, unlike the Gini coefficient, therefore causing difficulties with interpretation and comparison. Secondly, as the mean and standard deviation may be heavily affected by anomalous borderline values, the coefficient would not be an appropriate choice of income inequality measure for a case of abnormal data distribution.{{Cite journal |last=Trapeznikova |first=Ija |date=2019-07-17 |title=Measuring income inequality |url=https://wol.iza.org/articles/measuring-income-inequality/long |journal=IZA World of Labor |language=en-US |doi=10.15185/izawol.462|doi-access=free }} |
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=== Variance of the Natural Logarithm of Income === |
=== Variance of the Natural Logarithm of Income === |
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The variance of log Income is described as variance applied to the distribution of log incomes.{{Cite journal |last1=Foster |first1=James E. |last2=Ok |first2=Efe A. |date=July 1999 |title=Lorenz Dominance and the Variance of Logarithms |url=http://dx.doi.org/10.1111/1468-0262.00057 |journal=Econometrica |volume=67 |issue=4 |pages=901–907 |doi=10.1111/1468-0262.00057 |issn=0012-9682}} This scale invariant measure of relative inequality is sensitive to the left tail, making it ideal to use when studying the levels of poverty of the lower income half (the poor). |
The variance of log Income is described as variance applied to the distribution of log incomes.{{Cite journal |last1=Foster |first1=James E. |last2=Ok |first2=Efe A. |date=July 1999 |title=Lorenz Dominance and the Variance of Logarithms |url=http://dx.doi.org/10.1111/1468-0262.00057 |journal=Econometrica |volume=67 |issue=4 |pages=901–907 |doi=10.1111/1468-0262.00057 |issn=0012-9682}} This scale [[invariant measure]] of relative inequality is sensitive to the left tail, making it ideal to use when studying the levels of poverty of the lower income half (the poor). |
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===Wage share=== |
===Wage share=== |
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# The comparison of inequality measures requires that the segmentation of compared groups (societies etc.) into quintiles should be similar. |
# The comparison of inequality measures requires that the segmentation of compared groups (societies etc.) into quintiles should be similar. |
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# Distinguish properly, whether the basic unit of measurement is households or individuals. The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. And households have a varying number of members. The metrics will be influenced either upward or downward depending on which unit of measurement is used. |
# Distinguish properly, whether the basic unit of measurement is households or individuals. The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. And households have a varying number of members. The metrics will be influenced either upward or downward depending on which unit of measurement is used. |
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#Consider 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 affects the conclusions which can be drawn from a measured 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. |
#Consider 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 affects the conclusions which can be drawn from a measured inequality. It has been estimated (by A.S. Blinder in ''The Decomposition of Inequality'', [[MIT Press|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. |
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#Clarify whether real or nominal income distributions should be used. What effect will inflation have on absolute measures? Do some groups (e.g., pensioners) feel the effect of inflation more than others? |
#Clarify whether real or nominal income distributions should be used. What effect will inflation have on absolute measures? Do some groups (e.g., pensioners) feel the effect of inflation more than others? |
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#When drawing conclusion from inequality measurements, consider how we should 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? |
#When drawing conclusion from inequality measurements, consider how we should 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? |
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