3.5

Economic inequality

How unequal is economic well-being across society? To answer this, we must look at the distribution of income and wealth.

There are a number of ways we can measure inequality. One is to look at the relative size of the middle class. Is it increasing or decreasing, in relation to the total number of people or households in society?

Economists generally prefer to measure how far away we are from what is known as ‘perfect equality’, where everyone has the same level of income or wealth. The difference between reality and this perfect equality is measured by what is known as the GINI coefficient.

GINI is pronounced the same way as the mythical “genie” in the bottle and was named after Italian statistician, Corrado Gini, back in 1912.

Statistically, a GINI coefficient of 1 is perfect inequality and a GINI coefficient of 0 is perfect equality. To give you an example of this in practice, for Australia in 2015-16, the GINI coefficient for household wealth was 0.61 and for gross household income was 0.45.

Let’s see how it works

The GINI coefficient (the measure of income inequality) is represented in the graph below, known as a Lorenz Curve. A Lorenz Curve (named after American economist, Max Lorenz in 1905) is a way of visually representing economic inequality.

• The vertical axis represents the percentage of total income or wealth for the society
• The horizontal axis represents the cumulative percentage of individuals ordered from low to high income or wealth.

The 45 degree, straight dotted line represents perfect equality. You’ll also notice there are two Lorenz curves beneath it.

• The first curve beneath the dotted line represents low inequality
• The curve below it is much more bowed out. It represents higher levels of inequality.

The size of the area between the 45 degree line and each curved line is indicated by the GINI coefficient.

Let’s look at the points on the lower curve, representing higher inequality

• Locate Point A on this curve. It shows that the bottom 50% of individuals by income or wealth have 20% of total income or wealth in society.
• Now, locate Point B. It shows that the top 10% of individuals (100 minus 90) have 40% of total income or wealth (100 minus 60).

These numbers are fairly typical for the wealth distribution in advanced countries such as Australia. Income distribution is similar to the wealth distribution, although somewhat less unequal.

The GINI coefficient in recent history

In the decade leading up to the Global Financial Crisis in 2008, inequality, as measured by the GINI coefficient for household income, increased in a number of advanced economies including the U.S., according to the World Bank. Since then, it has tended to decrease somewhat.

This varies across countries and depending on the measure of inequality used. In Australia for example, the GINI coefficient for household income increased from 0.3 in the late 1990s to 0.34 in 2008, but decreased to 0.32 in 2016. Whether an increase from 0.3 to 0.32 over 20 years is regarded as big or small is ultimately a value judgement. What do you think?