Are Top Shares a Good Measure of Inequality?

Thursday, 19 July 2018: 08:50
Oral Presentation
Guillermina JASSO, Sociology, New York University, New York, NY, USA
Newly precise evidence of the trajectory of top incomes in the United States and around the world relies on shares and ratios, prompting new inquiry into their properties as inequality measures. Current evidence suggests a mathematical link between top shares and the Gini coefficient and empirical links extending as well to the Atkinson measure. The work reported in this paper strengthens that evidence, making several contributions: First, it formalizes the shares and ratios, showing that as monotonic transformations of each other, they are different manifestations of a single inequality measure, here called TopBot. Second, it presents a standard form of TopBot that satisfies the principle of normalization - ranging from zero to one, with zero representing perfect equality and inequality increasing as the measurego es toward one -- but also finds that, compared to shares and ratios, the standard form is somewhat blunt in depicting changes in inequality. Third, it presents a new link between top shares and the Gini coefficient, showing that properties and results associated with the Lorenz curve pertain as well to top shares. Fourth, it investigates TopBot in mathematically specified probability distributions, showing that TopBot is monotonically related to classical measures, such as the Gini, Atkinson, and Theil measures and the coefficient of variation. Thus, TopBot appears to be a genuine inequality measure. Moreover, TopBot is further distinguished by its ease of calculation and ease of interpretation, making it an appealing People's measure of inequality. This work also provides new insights, for example, that, given nonlinearities in the (monotonic) relations among inequality measures, Spearman correlations are more appropriate than Pearson correlations, and that weakening of correlations signals differences and shifts in distributional form, themselves signals of income dynamics.