Article: Who Exactly are the 1%?

(The Economist Jan 21^st 2012)

Article Summary

The richest 1% earn roughly half their income from wages and salaries, a quarter from self-employment and business income, and the remainder from interest, dividends, capital gains and rent. According to an analysis of tax returns by Jon Bakija of Williams College and two others, 16% of the top 1% were in medical professions and 8% were lawyers: shares that have changed little between 1979 and 2005, the latest year the authors examined (see chart). The most striking shift has been the growth of financial occupations, from just under 8% of the wealthy in 1979 to 13.9% in 2005. Their representation within the top 0.1% is even more pronounced: 18%, up from 11% in 1979.

Economic terminologies

The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" (Italian: Variabilità e mutabilità).

 The Gini coefficient measures the inequality among values of a frequency distribution(for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income).

Opinions

The Gini coefficient's main advantage is that it is a measure of inequality by means of a ratio analysis. This makes it easily interpretable, and avoids references to a statistical average or position unrepresentative of most of the population, such asper capita income or gross domestic product. The simplicity of Gini makes it easy to use for comparison across diverse countries and also allows comparison of income distributions across different groups as well as countries; for example the Gini coefficient for urban areas differs from that of rural areas in many countries (though not in the United States). Like any time-based measure, Gini coefficients can be used to compare income distribution over time, thus it is possible to see if inequality is increasing or decreasing independent of absolute incomes.

The limitations of Gini largely lie in its relative nature: It loses information about absolute national and personal incomes. Countries may have identical Gini coefficients, but differ greatly in wealth. Basic necessities may be equal (available to all) in a rich country, while in the poor country, even basic necessities are unequally available.

By measuring inequality in income, the Gini ignores the differential efficiency of use of household income. By ignoring wealth (except as it contributes to income) the Gini can create the appearance of inequality when the people compared are at different stages in their life. Wealthy countries (e.g. Sweden) can appear more equal, yet have high Gini coefficients for wealth (for instance 77% of the share value owned by households is held by just 5% of Swedish shareholding households). These factors are not assessed in income-based Gini.