Income Distribution and Inequality

From individual wages to social distribution

Market income includes wages, self-employment income, rent, interest, and profit received before taxes and transfers. Disposable income is what households have after direct taxes and cash transfers. Wealth is a stock of assets minus debts, so wealth inequality and annual income inequality are related but different.

An average can rise while many households see little gain. Distributional tools show who receives the total, not only how large the total is.

Measuring shares

Economists often rank households from lowest to highest income and divide them into five equal-sized quintiles. An income share reports the percentage of total income received by each group. Equal quintiles would each receive 20%, but equality is a benchmark rather than a prediction or complete ethical rule.

Comparisons should use consistent units. Household size, taxes, transfers, inflation, and whether income is measured annually or over a lifetime can change the picture.

The Lorenz curve

A Lorenz curve plots cumulative population on the horizontal axis and cumulative income on the vertical axis. It begins at $(0,0)$ and ends at $(100,100)$. The 45-degree line represents perfect equality; a curve bowed farther below it represents greater relative inequality.

If the bottom two quintiles receive 6% and 12%, the point at 40% of population is $(40,18)$, not $(40,12)$. The curve uses cumulative shares, so each group's share must be added to all earlier groups.

Gini intuition

The Gini coefficient compares the area between the equality line and Lorenz curve with the full triangle below equality. It ranges from 0 under perfect equality toward 1 under extreme concentration:

$G = \frac{\text{area between equality and Lorenz}}{\text{area below equality}}$

For grouped data, trapezoids provide an approximation. A lower Gini means a more equal relative distribution, but it does not tell us that average income is high.

Worked comparison

Country A's quintile shares are 8, 13, 17, 24, and 38 percent. Its cumulative shares are 8, 21, 38, 62, and 100 percent. Country B's shares are 4, 8, 13, 22, and 53 percent, giving cumulative shares 4, 12, 25, 47, and 100. At every interior population point, A's Lorenz curve is higher, so A is unambiguously more equal by Lorenz dominance.

What the measures miss

Inequality is not the same as poverty. A society can have unchanged relative shares while every income doubles, reducing absolute poverty without changing Gini. Two crossing Lorenz curves also cannot be ranked unambiguously without choosing an additional social judgment.

Reported income may omit public services, unpaid household work, informal income, or unrealized capital gains. Data quality and the unit of analysis matter, especially when comparing countries.

Population group:  Bottom 20%  Second 20%  Middle 20%  Fourth 20%  Top 20%
Income share:          4%          9%          15%         24%        48%

Measurement tells us how outcomes are distributed, but policy evaluation also asks what must be given up to change them. The final section combines distribution with efficiency and feasible social choices.