When talking about 'Inclusion' as important part of Green Economy, amongst others it comes to the distribution of wellbeing. How equally or inequally are income and property allotted in society. However, it is not easy to decide how to measure inequality. In the FP7 project NETGREEN we are discussing intensely which indicator might be the most useful in indicating inequality as an important social indicator.
Measuring this distribution is crucial to assess the state of a society. So far, the Gini coefficient has dominated the inequality indicator landscape. However, lately many critical voices have risen, saying that Gini coefficient can not offer any answers to the question “What happens to the richest and the poorest people?”. However, this is the question that seems to concern the most people. It is not primarily about all changes of income distribution, it is about the lowest earners left behind in society and the highest people charging ahead too far. It is about the poor and the rich.
The Gini coefficient on the other hand weights changes to the income distribution just the same, whether they happen at the top, at the bottom or in the middle of the income scale. Seeing that an Euro can have a different value to earners at the top and the bottom this can be perceived as a problem. Thus, compared to a common understanding of inequality the index is over-sensitive to changes in the middle of the distribution while being insensitive to changes at the top and bottom of the distribution. However, it is still the most used indicator when it comes to the task of measuring income inequality. The popularity of the Gini index might be explained by the high understandability (what the coefficient indicates and how it is computed), making explanation, communication and dissemination relatively easy.
However, the Palma ratio is increasingly being used in order to tackle the knowledge gap about the top and the bottom of the income scale. This ratio is defined as the ratio of the richest 10% of the populations Gross National Income share divided by the poorest 40%'s share. This means, in a society with a Palma ratio of 4, the top 10 percent is grabbing four times the income of the bottom 40 percent. Contrarily to Gini coefficient, the Palma ratio therefore measures only changes to the distribution of income if it either affects the lowest earners or the highest earners and therefore relates better to the common understanding of inequality.
In March 2013, 90 economists (now including Nobel Prize-winning economist Joseph E. Stiglitz, academics and development experts urged a key UN economic development panel to put inequality at the heart of any potential post-2015 framework discussed during the meeting of the High Level Panel in Bali in order to eradicate extreme poverty in all its dimensions by 2030. They strongly suggested to use the Palma ratio to measure it. In an article Joseph E. Stiglitz and Michael W. Doyle proposed to add “Eliminating Extreme Inequality” as a ninth Sustainable Development Goal for the post-2015 process.
There is a wide range how to perceive inequality and what the impacts are. The recently published book “Capital in the 21st century” by Thomas Picketty “could attract attention to the issue of globally growing wealth inequalities. Either the way, whatever your policy recommendations may look like: a reliable and highly diagnostic indicator is needed to assess changes in the two extremes of income distribution. The Palma ratio could fit in that gap.
If you want to keep track on the ongoing discussions about the right indicators and the project NETGREEN, please visit the project page http://netgreen-project.eu/ and do not hesitate to contact NETGREEN members.
# A short video by Alex Cobham and Andy Sumner how the Palma ratio is working
# Putting the Gini back in the bottle? 'The Palma' as a policy-relevant measure of inequality, a paper by Alex Cobham and Andy Sumner, March 2013
# A better yardstick for measuring inequality, an article by Sam Pizzigati, March 2014
# On the Interpretation (and Misinterpretation) of Inequality Decompositions by Income Sources, a paper by Ayal Kimhi, September, 2009
# an interesting visualization how the Gini coefficient is indicating a rising inequality in the U.S. (be aware: red is here showing a low Gini value, green a high Gini value, what seems to be a bit contra intuitive)
# (in German) short film: Mit offenen Karten Paradoxe Entwicklung der Ungleichheit auf der Welt (Arte)
# (in French) short film: Le Dessous des Cartes, Paradoxes des inégalités mondiales (Arte)
[Marius writes his Master thesis within the NETGREEN project and works part time for Ecologic Institute. He holds a BSc in BioGeoSciences and is currently enrolled in the MSc Global Change Ecology program. In his work, he will focus on the relationships between the indicators and search for synergies and trade-offs. He is dedicated to the combination of social and ecological policy making.]