Is it all about the tails? The Palma measure of income inequality

Working Paper 2013-308

Abstract

The “Palma” is the ratio of national income shares of the top 10 percent of households to the bottom 40 percent, reflecting Gabriel Palma’s observation of the stability of the “middle” 50 percent share of income across countries so that distribution is largely a question of the tails. In this paper we explore the Palma and corroborate the findings that the middle does indeed hold over time and through various stages of tax and transfers. Further, we find that the Gini is almost completely “explained” by only two points of the distribution: the same income shares which determine the Palma. It thus appears that both the Gini and the Palma, in practice, summarize the same information about the income distribution: but only in the case of the Palma is this explicit. This, we argue, makes the Palma a more useful (and intuitive) measure of inequality for policymakers and citizens to track.

Authors: Alex Cobham, Andrew Sumner.