A New Way to Measure Inequality

Traditionally, income inequality has been measured by something called the Gini coefficient. The Gini coefficient is measured on a scale from 0 to 1, with 0 meaning no inequality and 1 meaning a small number of people control the entirety of the wealth. While the Gini coefficient is an excellent indicator of whether or not there is inequality, it does nothing to tell us where it came from except in the case of extreme values. A new measure, the Ortega parameters, seeks to correct that.

It’s commonly thought that the wealth gap is primarily between high-income earners and low-income earners, and that the middle class is effectively nonexistent. That isn’t always the case, and the Ortega parameters can determine where this analysis is accurate and where it is not. There are two separate measures that make up the Ortega parameters: inequality between low-income and middle-to-high-income earners, and inequality between very high income earners and the rest of the population. If a population has low inequality on the first scale and high inequality on the second scale, it simply means that a small number of extremely wealthy individuals live there, but the overall inequality is actually fairly low. The Gini coefficient would not notice this nuance and just rate it as highly unequal. Determining the cause of inequality can also help to devise countermeasures: in areas with high inequality between the lower income earners and middle income earners, the solution is a higher minimum wage; in areas with a few very wealthy individuals, that is better fixed with taxes on high income earners.

Photo by Elena Mozhvilo on Unsplash

More: https://hbswk.hbs.edu/item/income-inequality-is-rising-are-we-even-measuring-it-correctly

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