MEASURING
INCOME
INEQUALITIES
Featuring the Lorenz
Curve, the Gini Coefficient
and more…
MEASURING INCOME INEQUALITIES
Economists use quintiles to measure the amount of
income earned by different segments of the
population.
In a fantasy world of perfect equality, each quintile
would equally share a % of the country’s total
income.
THIS IS NO FANTASY WORLD
As you know, our world is far, far away from an
income equality fantasy world.
When examining quintiles, we can say that in
general, the less income received by the lowest
quintile, or the more income received by the
highest quintile, the greater the inequality of
income
THE LORENZ CURVE
THE LORENZ CURVE
The Lorenz curve plots the actual relationship
between percentages of the population and the
shares of income they receive.
The closer the Lorenz curve is to the 45 degree
line of perfect income equality, the more equitable
the distribution of income is in a country
BAD LORENZ CURVE!
SHAME ON BRAZIL
Brazil serves as an excellent example of a country
with a frighteningly unequal distribution of income.
 In Brazil a tiny percentage of people receive a
very large amount of the income, while millions live
in slums and suffer through life.
BETTER LORENZ CURVE
HOORAY FOR SWEDEN!
Sweden presents an example of a country with a
more equal distribution of income. While we can
certainly see that the wealthy have a higher
percentage of income than the lower class, Sweden
does a better job of creating a society where
income is more evenly spread out
IN GENERAL…..
The closer a country’s Lorenz curve is to the 45
degree line of perfect income equality, the less
discrepancy exists between the haves and the havenots
THE GINI COEFFICIENT
The Gini Coefficient is a summary measure of the
information contained in the Lorenz curve. It is
defined as:
Area b/w 45 degree line and Lorenz Curve /
Entire area under 45 degree line
VALUES OF THE GINI COEFFICIENT
Perfect income equality = 0. The larger the Gini
coefficient, and the closer it is to 1, the more
inefficient is the distribution of income.
So a country with a Lorenz curve close to the 45
degree line would have a lower Gini coefficient, and
a value closer to 0
GINI EXAMPLES
Brazil = .6
Denmark = .25
REDISTRIBUTING INCOME
Countries aiming to redistribute income from the
wealthy to the poor will see their Lorenz curve
shift closer to the 45 degree line.
This will result in a smaller value for their Gini
coefficient and create a more equal society.
SOME CONCLUSIONS
Based on some relatively recent data, highly
unequal income distribution (above .45) is seen
only among lesser developed countries.
The MDCs with the highest Gini numbers, thus the
most unequal are New Zealand (.44) and the U.S.A.
(.41)
SOME CONCLUSIONS
Considering LDCs, Gini coefficients above
.45 are not at all uncommon, suggesting that in
many poor countries you have a small upper
class with lots of money, and a very large
lower class with very little money
THE LAFFER CURVE
Or should that be spelled
Laugher Curve?
LAFFER CURVE
Introduced by an American economist (the story is
he wrote it on a bar napkin in 2 minutes) in 1974,
Laffer’s curve argues for the idea that higher taxes
are a disincentive to work.
LAFFER CURVE
Laffer reasoned that lower taxes would create
incentives for people to work harder, work longer,
take risks, and invest more.
All this magic would shift LRAS to the right, create
economic growth, and actually result in more taxes
collected!
LAFFER CURVE
LAFFER CURVE
So Laffer’s curve argues that tax collected will be 0
at rates of 0% and 100%. When tax rates are low,
tax revenue will begin to rise as the tax rate
increases.
Eventually, a tax rate is reached after which tax
revenues will decline if the tax rate increases any
further.
REAGAN AND LAFFER
REAGAN AND LAFFER
Reagan thought Laffer’s curve was a work of genius
and immediately cut taxes, especially on the
wealthy.
Unfortunately, tax revenues did not increase, and
the U.S. deficit ballooned. But people continue to
believe…..
HATING ON THE LAFFER CURVE
Tax cuts don’t incentivize people to work more!
Tax cuts have a greater demand-side effect than
supply-side effect. Inflation may result, interest
rates may rise, leading to less aggregate demand
and lower tax revenues for sure
HATING ON THE LAFFER CURVE
Laffer’s curve is far from scientific. It’s nearly
impossible to identify what the ideal tax rate would
be. I n addition, this rate could be variable over
time, and certainly would vary among countries.
Many economists dismiss the Laffer curve as an
oversimplification…
HATING ON THE LAFFER CURVE
Laffer’s argument may apply to the very wealthy at
high tax rates, but isn’t valid for most people at
lower tax rates
The legacy of the Reagan administration provides
enough evidence to reject the Laffer curve and
wonder why it appears in an Economics textbook!