Income inequality – yet another measure

With President Obama visiting the Pope I thought I would go back to a report from about two weeks ago about income inequality in the District of Columbia. The D.C. Fiscal Policy Institute put forth a paper that put the District of Columbia income gap “one of the biggest in the U.S.”

The report started with the statement that the average income of the top 5% of households is the largest among large cities in the U.S. I really don’t care for comparisons that deal with just the raw numbers as the level of income in any local area is very much dependent on the cost of living in that area. The areas like the District of Columbia and San Francisco have higher costs of living numbers. Thus the average income for any group would be expected to be higher in those areas. To compare the various geographic areas adjustments for those differences are needed. That is why many economists rely on the measures like the Gini Index to measure income inequality.

In comparing the various metropolitan areas the D.C Fiscal Policy Institute used their own measure of the income gap. They choose the ratio of the average income of the top 5% to the average income of the bottom 20%. They certainly have the right to choose whatever measure they wish to use. But a multitude of differencing measures, to me at least, creates confusion. There already exists a similar measure to theirs. It is the Palma Index of income inequality. That measure is calculated as the average income of the top 10% to the average income of the bottom 40%. Why not stick with that measure? I suspect because the D.C. Fiscal Policy Institute makes the level of inequality appear worst.

Given that he Palma measure is already in place I don’t see the value of new and essentially similar measure. I do not know of a single measure the captures the true picture of the level of income inequality for comparative purposes. I did come across another interesting piece comparing the Palma Index to the Gini Index. That post was in response to comments about the author’s paper on the Palma Index. Both of the post and the paper are a year old. To my reading the post shows that both the Palma and the Gini have serious shortcomings.

Significant income inequality is real. Measuring it and how it changes is still a work in progress.