Publication: Measuring Inequality from Top to Bottom
Loading...
Files in English
676 downloads
Published
2015-04
ISSN
Date
2015-05-04
Author(s)
Editor(s)
Abstract
This paper presents a new methodology to measure inequality that optimally combines household survey information and tax records to construct a complete income distribution. Combining the two data sources is necessary because, on the one hand, household surveys do not accurately represent the wealthiest segment of the population, while tax records do; on the other hand, the opposite is true for the lower end of the income distribution: tax records only include incomes above a certain threshold. The key innovation of the proposed methodology—and the main difference from the existing literature—is the choice of an optimal income threshold b. The Gini coefficient for the population is then computed combining the conditional income distributions for incomes below b (using household survey data) and above b (using tax records). Central to this methodology is the fact that b is not chosen arbitrarily: it should be determined in such a way as to minimize reliance on household survey data to compute the top of the income distribution. In practice, the optimal b corresponds to the minimum income level that triggers mandatory tax filing. The proposed methodology is applied to the case of Colombia.
Link to Data Set
Citation
“Diaz-Bazan, Tania. 2015. Measuring Inequality from Top to Bottom. Policy Research Working Paper;No. 7237. © World Bank. http://hdl.handle.net/10986/21851 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Global Poverty Revisited Using 2021 PPPs and New Data on Consumption(Washington, DC: World Bank, 2025-06-05)Recent improvements in survey methodologies have increased measured consumption in many low- and lower-middle-income countries that now collect a more comprehensive measure of household consumption. Faced with such methodological changes, countries have frequently revised upward their national poverty lines to make them appropriate for the new measures of consumption. This in turn affects the World Bank’s global poverty lines when they are periodically revised. The international poverty line, which is based on the typical poverty line in low-income countries, increases by around 40 percent to $3.00 when the more recent national poverty lines as well as the 2021 purchasing power parities are incorporated. The net impact of the changes in international prices, the poverty line, and new survey data (including new data for India) is an increase in global extreme poverty by some 125 million people in 2022, and a significant shift of poverty away from South Asia and toward Sub-Saharan Africa. The changes at higher poverty lines, which are more relevant to middle-income countries, are mixed.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Gender Gaps in the Performance of Small Firms: Evidence from Urban Peru(Washington, DC: World Bank, 2025-09-23)This paper estimates the gender gap in the performance of firms in Peru using representative data on both formal and informal firms. On average, informal female-led firms have lower sales, labor productivity, and profits compared to their male-led counterparts, with differences more pronounced when controlling for observable determinants of firm performance. However, gender gaps are only significant at the bottom of the performance distribution of informal firms, and these gaps disappear at the top of the distribution of informal firms and for formal firms. Possible explanations for the performance gaps at the bottom of the distribution include the higher likelihood of small, female-led firms being home-based, which is linked to lower profits, and their concentration in less profitable sectors. The paper provides suggestive evidence that household responsibilities play a key role in explaining the gender gap in firm performance among informal firms. Therefore, policies that promote access to care services or foster a more equal distribution of household activities may reduce gender productivity gaps and allow for a more efficient allocation of resources.Publication The Exposure of Workers to Artificial Intelligence in Low- and Middle-Income Countries(Washington, DC: World Bank, 2025-02-05)Research on the labor market implications of artificial intelligence has focused principally on high-income countries. This paper analyzes this issue using microdata from a large set of low- and middle-income countries, applying a measure of potential artificial intelligence occupational exposure to a harmonized set of labor force surveys for 25 countries, covering a population of 3.5 billion people. The approach advances work by using harmonized microdata at the level of individual workers, which allows for a multivariate analysis of factors associated with exposure. Additionally, unlike earlier papers, the paper uses highly detailed (4 digit) occupation codes, which provide a more reliable mapping of artificial intelligence exposure to occupation. Results within countries, show that artificial intelligence exposure is higher for women, urban workers, and those with higher education. Exposure decreases by country income level, with high exposure for just 12 percent of workers in low-income countries and 15 percent of workers in lower-middle-income countries. Furthermore, lack of access to electricity limits effective exposure in low-income countries. These results suggest that for developing countries, and in particular low-income countries, the labor market impacts of artificial intelligence will be more limited than in high-income countries. While greater exposure to artificial intelligence indicates larger potential for future changes in certain occupations, it does not equate to job loss, as it could result in augmentation of worker productivity, automation of some tasks, or both.Publication Geopolitical Risks and Trade(Washington, DC: World Bank, 2025-09-23)This paper studies the impact of geopolitical risks on international trade, using the Geopolitical Risk (GPR) index of Caldara and Iacoviello (2022) and an empirical gravity model. The impact of spikes in geopolitical risk on trade is negative, strong, and heterogeneous across sectors. The findings show that increases in geopolitical risk reduce trade by about 30 to 40 percent. These effects are equivalent to an increase of global tariffs of up to 14 percent. Services trade is most vulnerable to geopolitical risks, followed by agriculture, and the impact on manufacturing trade is moderate. These negative effects are partially mitigated by cultural and geographic proximity, as well as by the presence of trade agreements.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Measuring Ancient Inequality(World Bank, Washington, DC, 2007-11)Is inequality largely the result of the Industrial Revolution? Or, were pre-industrial incomes and life expectancies as unequal as they are today? For want of sufficient data, these questions have not yet been answered. This paper infers inequality for 14 ancient, pre-industrial societies using what are known as social tables, stretching from the Roman Empire 14 AD, to Byzantium in 1000, to England in 1688, to Nueva España around 1790, to China in 1880 and to British India in 1947. It applies two new concepts in making those assessments - what the authors call the inequality possibility frontier and the inequality extraction ratio. Rather than simply offering measures of actual inequality, the authors compare the latter with the maximum feasible inequality (or surplus) that could have been extracted by the elite. The results, especially when compared with modern poor countries, give new insights in to the connection between inequality and economic development in the very long run.Publication Distributions in Motion : Economic Growth, Inequality, and Poverty Dynamics(2010-09)The joint determination of aggregate economic growth and distributional change has been studied empirically from at least three different perspectives. A macroeconomic approach that relies on cross-country data on poverty, inequality, and growth rates has generated some interesting stylized facts about the correlations between these variables, but has not shed much light on the underlying determinants. "Meso-" and microeconomic approaches have fared somewhat better. The microeconomic approach, in particular, builds on the observation that growth, changes in poverty, and changes in inequality are simply different aggregations of information on the incidence of economic growth along the income distribution. This paper reviews the evolution of attempts to understand the nature of growth incidence curves, from the statistical decompositions associated with generalizations of the Oaxaca-Blinder method, to more recent efforts to generate "economically consistent" counterfactuals, drawing on structural, reduced-form, and computable general equilibrium models.Publication Growth, Inequality, and Social Welfare : Cross-Country Evidence(World Bank, Washington, DC, 2014-04)Social welfare functions that assign weights to individuals based on their income levels can be used to document the relative importance of growth and inequality changes for changes in social welfare. In a large panel of industrial and developing countries over the past 40 years, most of the cross-country and over-time variation in changes in social welfare is due to changes in average incomes. In contrast, the changes in inequality observed during this period are on average much smaller than changes in average incomes, are uncorrelated with changes in average incomes, and have contributed relatively little to changes in social welfare.Publication Measuring Inequality of Opportunity with Imperfect Data : The Case of Turkey(World Bank, Washington, DC, 2010-02)The measurement of inequality of opportunity has hitherto not been attempted in a number of countries because of data limitations. This paper proposes two alternative approaches to circumventing the missing data problems in countries where a demographic and health survey and an ancillary household expenditure survey are available. One method relies only on the demographic and health survey, and constructs a wealth index as a measure of economic advantage. The alternative method imputes consumption from the ancillary survey into the demographic and health survey. In both cases, the between-type share of overall inequality is computed as a lower bound estimator of inequality of opportunity. Parametric and non-parametric estimates are calculated for both methods, and the parametric approach is shown to yield preferable lower-bound measures. In an application to the sample of ever-married women aged 30-49 in Turkey, inequality of opportunity accounts for at least 26 percent (31 percent) of overall inequality in imputed consumption (the wealth index).Publication Main Drivers of Income Inequality in Central European and Baltic Countries : Some Insights from Recent Household Survey Data(2009-01-01)Present levels of income inequality in Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia, and Slovenia remain considerably higher than their pre-transition levels, although the relative pace of change over time has varied quite a bit across countries. Using data from the 2006 European Union Survey of Income and Living Conditions, this paper finds that prevailing levels of income inequality in these countries continue to be low by international standards, and that this is in large part due to the very high redistributive impact of direct taxes and public transfers. In addition to the instrumental role of tax and transfer policies in redistributing income, the paper highlights the important role played by differences in education levels and labor market participation rates in explaining observed inequalities across people and across different regions (although not in explaining observed differences across countries). The paper includes an analysis of key factors that help explain observed variation across countries in the level of public support for redistribution, including peoples' economic background and relative success in life, whether they perceive poverty to be associated with factors within or outside the control of those it afflicts (for example, laziness/lack of willpower vs. injustice in society).
Users also downloaded
Showing related downloaded files
Publication Global Economic Prospects, June 2025(Washington, DC: World Bank, 2025-06-10)The global economy is facing another substantial headwind, emanating largely from an increase in trade tensions and heightened global policy uncertainty. For emerging market and developing economies (EMDEs), the ability to boost job creation and reduce extreme poverty has declined. Key downside risks include a further escalation of trade barriers and continued policy uncertainty. These challenges are exacerbated by subdued foreign direct investment into EMDEs. Global cooperation is needed to restore a more stable international trade environment and scale up support for vulnerable countries grappling with conflict, debt burdens, and climate change. Domestic policy action is also critical to contain inflation risks and strengthen fiscal resilience. To accelerate job creation and long-term growth, structural reforms must focus on raising institutional quality, attracting private investment, and strengthening human capital and labor markets. Countries in fragile and conflict situations face daunting development challenges that will require tailored domestic policy reforms and well-coordinated multilateral support.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication Commodity Markets Outlook, April 2025(Washington, DC: World Bank, 2025-04-29)Commodity prices are set to fall sharply this year, by about 12 percent overall, as weakening global economic growth weighs on demand. In 2026, commodity prices are projected to reach a six-year low. Oil prices are expected to exert substantial downward pressure on the aggregate commodity index in 2025, as a marked slowdown in global oil consumption coincides with expanding supply. The anticipated commodity price softening is broad-based, however, with more than half of the commodities in the forecast set to decrease this year, many by more than 10 percent. The latest shocks to hit commodity markets extend a so far tumultuous decade, marked by the highest level of commodity price volatility in at least half a century. Between 2020 and 2024, commodity price swings were frequent and sharp, with knock-on consequences for economic activity and inflation. In the next two years, commodity prices are expected to put downward pressure on global inflation. Risks to the commodity price projections are tilted to the downside. A sharper-than-expected slowdown in global growth—driven by worsening trade relations or a prolonged tightening of financial conditions—could further depress commodity demand, especially for industrial products. In addition, if OPEC+ fully unwinds its voluntary supply cuts, oil production will far exceed projected consumption. There are also important upside risks to commodity prices—for instance, if geopolitical tensions worsen, threatening oil and gas supplies, or if extreme weather events lead to agricultural and energy price spikes.Publication State and Trends of Carbon Pricing 2024(Washington, DC: World Bank, 2024-05-21)This report provides an up-to-date overview of existing and emerging carbon pricing instruments around the world, including international, national, and subnational initiatives. It also investigates trends surrounding the development and implementation of carbon pricing instruments and some of the drivers seen over the past year. Specifically, this report covers carbon taxes, emissions trading systems (ETSs), and crediting mechanisms. Key topics covered in the 2024 report include uptake of ETSs and carbon taxes in low- and middle- income economies, sectoral coverage of ETSs and carbon taxes, and the use of crediting mechanisms as part of the policy mix.