Inequality Measurement and The Rich: Why Inequality Increased More Than We Thought

Abstract

To compare income and wealth distributions and to assess the effects of policy that affect those distributions require reliable inequality‐measurement tools. However, commonly used inequality measures such as the Gini coefficient have an apparently counter‐intuitive property: income growth among the rich may actually reduce measured inequality. We show that there are just two inequality measures that both avoid this anomalous behavior and satisfy the principle of transfers. We further show that the recent increases in US income inequality are understated by the conventional Gini coefficient and explain why a simple alternative inequality measure should be preferred in practice.