Measuring Inequality

Introduction

Economic inequality is a defining issue of our time. To understand inequality, we need a way of quantifying and tracking it. How should inequality be measured?

A useful measure of inequality should allow us to answer questions like:

• Does Australia have more inequality than India?
• Does Germany today have more or less inequality than West Germany did before unification?
• Has inequality in the United States risen or fallen since 2000?

To answer these questions, we need to compare inequality across time and space, as well as between societies with different population sizes and levels of prosperity.

There are two approaches we could take to do this. We could list the properties that we believe a sensible inequality measure should satisfy, and then look for a measure that satisfies these. This is called the axiomatic approach. Alternatively, we could use a measure that seems appropriate to us and then verify that it produces comparisons that match our intuition of how inequality should look.

Sometimes, these two approaches lead us to the same measure, as we shall see in this module.