Only the Top Counts? Power Law Distributions and the Measurement of Income Inequality
42 Pages Posted: 5 May 2022
Date Written: February 8, 2021
In recent years numerous studies published top income shares as way to assess the degree of income inequality. Top income shares measure how much percent of total income is captured by a certain top income group. Based on the assumption that high incomes follow a Pareto distribution, estimates from the World Inequality Database show that globally, the top 1% receive about 20% of world income. This number clearly suggests that income and power concentration is a serious issue. But what do top income related inequality measures really tell in terms of inequality and distribution of resources? The analysis of top incomes only takes incomes above a certain minimum threshold into consideration and leaves out income information below. This one-sided view on the income distribution gives reasons why related inequality measures may only pose a weak proxy for overall income inequality. In fact, as well-known researchers highlighted, a thorough analysis of inequality requires consideration of the complete income distribution. In that fashion, this
paper takes a critical view on top incomes as means of measuring inequality.
Keywords: Top incomes, income inequality, power laws, Pareto
JEL Classification: B10, D31, D63, O15
Suggested Citation: Suggested Citation