Pareto Coefficient in Income Distribution

Abstract

The distribution of income among countries is not symmetrical; rather it is close to Pareto type distribution. It shows consistent bi-modal shape between 1980 and 2007; and shifts to the original Pareto distribution after global financial crisis since 2008. A bi-modal type world income distribution implies a more severe inequality situation between groups of countries rather than among countries. The traditional inequality indexes measured as a whole is an aggregate result. Ignoring the shape of income distributions and difference between groups may overlook some essential features. The purpose of this paper is to investigate the world country income distribution considering its true distribution: bi-modal shape. We suggest to classify countries considering its bi-modal distribution and to estimate the Pareto coefficient of each groups as a complement measure of world income inequality.The result shows that the Pareto coefficient of higher income group is much larger than that of lower income group. Changes of inequality within two groups have significantly different or even opposite directions. The relation between income growth and inequality in the higher income group demonstrates quite different result from the lower income group. And further, the direction of the influences of the mean income on various inequality indexes are opposite between two groups. This study shows that income distributions between two groups possess distinctive features; to measure and discuss the inequality matters as a whole without considering the possible differences between groups may lead to a vague or biased result.