New offer! Get 30% off your first 2 months of Unlimited Monthly. Start your subscription for just £35.99 £24.99. New subscribers only T&Cs apply

Understanding inequality

How is the concept of income inequality defined? In this article, we present the approach to understanding and measuring income inequality.

What is inequality?

Inequality is, at its most basic, about the distribution of income and wealth. How are these distributed across a population which could be the population of a country or some other population?

We can compare how rich countries are by looking at what is known as their gross domestic product (GDP). This is basically a measure of national income, of the income that a country as a whole gets within any given year.

Average per-person income

Now, of course, a big country with a lot of people is usually going to have a bigger income than a smaller country, but that doesn’t necessarily mean that it is richer. To get a better indicator of how rich a country is, we usually divide the GDP by the population of a country so as to get an average per-person income.

This is useful, but it still tells us nothing about how income is actually distributed.

How is income distributed?

This distribution speaks to equality or a lack of it. If the average income of a country was in fact what each person received, we would consider this perfect equality.

However, we know that this is not the case and all countries have inequality of income, as does the world as-a-whole.

This inequality can actually be measured to give us a sense of how evenly income (or wealth) are distributed and by extension, how equal or unequal a population is.

The Gini Coefficient

The most common approach uses what is called the Gini Coefficient.

This Gini Coefficient gives a population, let’s say a country, a score of between zero and one (or it can be a score of between zero and 100) where one represents absolute inequality, that is to say, one person has everything and zero represents absolute equality – everybody has the same. Those are the extremes of a possible distribution.

What we do is, measure the actual distribution so we can give a score. It might be, say, 0.3 or 0.4, which tells us the overall level of inequality. So the higher the score, the higher it is to one, the more unequal that population is.

The Organisation for Economic Cooperation and Development (OECD)

Amongst richer countries that belong to the Organisation for Economic Cooperation and Development (OECD), Slovak Republic, Czech Republic, Slovenia, Iceland, Belgium and Norway all have very low Gini scores (below 0.3) whereas Bulgaria, Mexico, Chile and Costa Rica all have scores above 0.4.

Countries such as South Africa are thought to be even more unequal, but the data available is much older. The UK and the US both appear relatively unequal, with scores very close to 0.4.

Pre-tax and benefit inequality

It is worth pointing out that these scores have been worked out on incomes after taxes have been taken and benefits received. So, after the government has redistributed some of the income.

Pre-tax and benefit inequality is always higher, so all governments play a role in lowering inequality, but some countries see higher levels of distribution than others.

Other ways to define and measure inequality

There are other ways to define and measure inequality, such as comparing the earnings of the richest ten percent in a population with the poorest ten or even fifty percent of the same population. Different measures produce slight variations in rankings, but by and large, countries that present high Gini scores are also unequal on other measures.