Abstract
It is known that virtually all inequality measures imply the existence of a 'benchmark income', above which adding incremental income increases inequality, and below which it decreases inequality. Benchmark incomes can be interpreted as social reference levels that identify the richest individual for whom it would be just to subsidize their income. Despite the intuitive appeal of benchmark incomes, there have been hardly any empirical applications to date. This paper provides the first estimates of benchmark incomes for a range of contrasting countries and different inequality measures. All benchmark incomes lie far above official national poverty lines. The results suggest that economic growth together with falling inequality need not necessarily be poverty reducing.
Highlights
A number of theoretical studies have considered how incremental increases in income, at specific points in the income distribution, affect inequality
Across the ten countries, the benchmark percentiles implied by the Gini coefficient lay on average 50 percentiles above the official poverty line percentile. This is one of the first studies to illustrate where benchmark incomes lie in practice, across a selection of contrasting countries
Across the ten countries studied, on average, half of the income distribution lay above the official poverty line but below the benchmark income implied by the Gini coefficient
Summary
A number of theoretical studies have considered how incremental increases in income, at specific points in the income distribution, affect inequality. All inequality measures (all that embody social preferences that satisfy a strong version of the Pigou-Dalton transfer property) are associated with a benchmark income or position, above which adding increments of income increases inequality, and below which it decreases inequality [1]. The benchmark income, guaranteed by the strong Pigou-Dalton transfer property, is a distinguishing feature of inequality measures that sets them apart from both poverty measures and social welfare functions [1]. Poverty lines are often criticised for being largely arbitrary, with little theoretical basis for choosing a particular poverty line. This applies to relative poverty lines based on, for example, some percentage of the median income, as used in many countries.
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