Measuring inequality: Income Quintile Ratio

In the previous article we talked about the Gini coefficient, this coefficient uses the Lorenz curve to indicate the income inequality in a population, and it is the most widely used measure of inequality in the academy. However, other measures can give us a better idea of the inequality in a country by measuring the data in a different way, such as the Income Quintile Ratio.

The Income Quintile Ratio (IQR) is the standard used by the United Nations Development Programme (UNDP) to measure inequality. How does it work?

The math

First, we have to know that a quintile is a fifth of something. 1/5 or 20% in mathematical terms.

The Income Quintile Ratio (also called the 20/20 Ratio) is the average income of the richest 20% of a population divided by the average income of the poorest 20% of the population.

Let’s say that the average income of the richest 20% is $ 100,000 per year, and the poorest 20% is $ 20,000

$ 100,000 / $ 20,000 = 5

The IQR of this country would be 5, which means that the upper quintile has an income five times greater than the lower quintile.

The data

Now that we know how the Income Quintile Ratio works let’s look at the data (2012-2013)

Clarification about the coming data

Income Inequality World Map Countries by highest income inequality countries by lowest income inequality

Among the countries with data, the one with the highest IQR is Haiti, where the upper quintile has an income 32.47 times greater than the lower quintile. South Africa follows it with 27.91 and then Comoros with 26.7.

The countries with the smallest difference between the upper and lower quintile are Ukraine (3.32), Kazakhstan (3.65) and Kyrgyzstan (3.70).

In Europe, the country with the smallest IQR is Slovenia with 3.74 and the largest is Macedonia with 9.31.

In the United States, the upper quintile has an average income 9.11 times higher than the lower quintile, a value similar to that of China with a ratio of 9.16. Russia is below both with 8.19, and even with a lower inequality than these three are the United Kingdom, France, and Germany with 5.34, 5.29 and 4.62 respectively.

Is this a better measurement than the Gini coefficient?

It all depends on how you want to see things; the Gini coefficient measures the distribution of income among all sectors of the population while the IQR makes a comparison between the richest and the poorest. One of the advantages of the IQR over the Gini is that it is common for the intermediate quintiles (those between 20% and 80%) to obscure the situation of the lower quintile. A country with a flourishing middle-class but with a lower class in a position of high vulnerability would present a relatively low Gini index; this does not happen with the IQR.

At the end of the day the measures are relevant depending on what you want to know, and that is why it is important to know where the indicators that we see every day come from, otherwise we could end up forming opinions with wrong information.

Sources: World Bank, United Nations Development Program

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