Median-based measures of inequality: Reassessing the increase in income inequality in the U.S. and Sweden

Abstract

The increase in income inequality, due to a shift in favor of the upper end in the United States and other countries, has become a public policy concern. This paper shows that the Gini index, G, underestimates the rate of increase in inequality because a shift of income towards the top incomes increases both the numerator and denominator of G. A modified index (G2) ,w hich replaces the mean in the denominator by the median, indicates that income inequality in the United States grew at about twice the rate as the Gini index from 1967 to 2012. The analysis accounts for the effect of the changes made in the survey collection process in 1994. In contrast with the United States, while income inequality increased in Sweden, the shift in favor of the upper income region was less pronounced. The index G2 is readily computed from the mean, median and Gini index, published by many national statistical agencies. Although G2 may not be appropriate for some analytic purposes, it is an easily calculated summary descriptive measure that is more sensitive to important changes in the income distribution than the Gini index. Most other indices placing greater weight on the upper end of the income distribution must be calculated from micro-data.