The Gini coefficient

In his speech for confidence in the Senate, Prime Minister Mario Draghi cited the so-called “Gini coefficient” to indicate the increase in inequality in income distribution in the first half of 2020. But what is it about?

A distribution indicator

The Gini coefficient (named after the Italian statistician Corrado Gini) is one of the synthetic indicators used most often in official reports and in public debate to measure the inequality of an income or wealth distribution and assumes a value between 0 and 1.

Values ​​close to 0 indicate a homogeneous distribution, while values ​​close to 1 indicate a higher concentration.

It follows that societies characterized by greater inequality among citizens will present a value close to 1. In the case of a value equal to 1, an infinitely small group holds all the available resources.

Mathematically, the Gini coefficient (G) is calculated as the ratio between the area between the line of perfect equality and the Lorenz curve (A) and the total area under the line of perfect equality (A B ).

The downsides

The Gini coefficient has the advantage of providing an intuitive and immediate indication of inequality and can be used to compare the distribution of income or wealth between different states and economic-social systems at a given instant, or to study the trend of inequality over a certain period of time. A very important aspect of applying the Gini coefficient concerns its comparison with the trend of the GDP of a certain area or country. This makes it possible to investigate the relationship between the growth of a country’s wealth (which we can trace back to its GDP) and its distribution among the population. For example, if the Gini coefficient also increases as the GDP increases, it means that the wealth generated is concentrated in a small portion of the population.

The limits

The Gini coefficient, however, has several limitations:

• it does not provide any indication on which population groups (rich, middle class, poor) are getting richer than others;
• it does not allow to analyze the size of population groups;
• it does not allow policy makers to carry out an accurate analysis to be able to set up redistributive fiscal instruments.

Numerous economists prefer to use other indicators to analyze wealth inequality among different social classes. The economist Thomas Piketty in his best-seller “Capital in the 21st Century”, studying income distribution, distances himself from the use of the Gini coefficient as the indicator claims to summarize in a single number the complete inequality of the distribution, not guaranteeing the possibility of analyzing the relative inequality relationships (poor-middle class, poor-rich, middle class-rich). The Gini coefficient does not allow, therefore, to grasp the complexity of the multidimensional society, on the basis of a unidimensional value. Finally, according to the French economist, the coefficient tends to confuse labor inequality (income) and capital inequality (wealth, inheritance).

Therefore, numerous economists and inequality scholars prefer to use distribution tables that indicate the shares of the different deciles and centiles in the composition of total income and total wealth. These tables allow to quantify the measure of income and wealth levels of the different social groups that make up the social hierarchies, in order to outline a more concrete picture of the distribution of wealth. Furthermore, this study method allows the scholar\policy maker to be able to formulate models of redistribution of income or wealth through fiscal policy measures.