How Do We Measure Income Inequality?

The Gini coefficient is a commonly used measure of income inequality. It condenses entire income distribution for countries into a single number between 0 and 1 – the higher the number, the greater the degree of income inequality.

The level of inequality differs widely around the world. Usually, emerging economies are more unequal than rich ones. Scandinavian countries have the lowest income disparities, with a Gini coefficient of around 0.26. The most unequal, like South Africa, registers around 0.67. The U.K. has a figure of around 0.36 while the U.S. is around 0.48.

Malaysia’s Gini coefficient according to the Economic Planning Unit, has improved to an all-time low of 0.40 in 2014.

This contradicts United Nations Human Development report that suggests the richest 10% control over 38% of income compared to poorest 10% who only have 1.7%. The World Bank puts Malaysia’s 2014 Gini coefficient at 0.421, higher than the Government’s calculation. Data discrepancies aside, how do we address inequalities?

• First, by reducing wage gaps, where the CEO of a major public listed company earns RM3.0 million (or more) and a fresh graduate earns only RM48,000 per annum;
• Second, improving social assistance for the poor so as to generate new income streams or create opportunities for re-education or upskilling; and
• Third, effective cash transfers or credit vouchers that meet daily needs of food, transport and shelter. Social and para-social organisations have long been involved in easing the burden of the poor.

Affordable quality education, fair wages and opportunities for entrepreneurship may help the next generation of Malaysians to reduce income disparities faced currently.

For more information about Gini coefficient, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.