3.3 Measuring income inequality
Now that you know better what income is, you’ll turn your attention to understanding how income inequality is measured.
Measurements of inequality are often centred on measures of the spread of incomes across people. One approach often used by economists to consider the spread of incomes is the use of percentiles, deciles or quintiles to divide the population into groups of hundreds, tenths, fifths, respectively in order of income. The income share of each group can then be compared.
Box 1 Percentiles, deciles and quintiles
Percentiles, deciles or quintiles are a useful way of measuring inequality. Suppose that all the individual incomes in the economy are lined up from smallest to highest. This distribution can be divided into groups of equal size to see how income is distributed.
If the individual incomes are divided into ten groups each group is referred to as a decile. The first decile shows those individuals with the lowest 10% of earnings, 90% of the population have a higher income than this group. The tenth decile shows the top 10% earners of the population.
The data may be split into smaller units such as hundredths, called percentiles. An individual at the 99th percentile has a higher income than 99% of the population but less than the top 1% of the population. The earnings of the top 1% of a population are often reported in a discussion of equality.
The data may also be grouped into larger sections. For example a quintile would divide the population into 5 groups. The first quintile will show that section of the population with the lowest 20% of earnings. 80% of the population receive a higher income than this group.
An important point in the distribution of incomes is the median, or the middle part of the income distribution. This occurs at the 50th percentile. At the median, 50% of the population have higher income and 50% have lower income.