Inequality and the Tails: the Palma Proposition and Ratio
| Date | 01 February 2016 |
| DOI | http://doi.org/10.1111/1758-5899.12320 |
| Author | Lukas Schlögl,Andy Sumner,Alex Cobham |
| Published date | 01 February 2016 |
Inequality and the Tails: the Palma Proposition
and Ratio
Alex Cobham, Lukas Schl€
ogl and Andy Sumner
King’s College, London
Abstract
The Palma Proposition is that changes in income or consumption inequality are (almost) exclusively due to changes in the
share of the richest 10 per cent and poorest 40 per cent because the ‘middle’group between the richest and poorest tend to
capture approximately 50 per cent of gross national income (GNI). The Palma Ratio is a measure of income or consumption
concentration based on the above-mentioned proposition and calculated as the GNI capture of the richest 10 per cent divided
by that of the poorest 40 per cent. In this paper we revisit the empirical basis of the Palma Proposition (the relative stability
of the ‘middle’) with a new and expanded data set across and within developing and developed countries. We find the data
reaffirms the Palma Proposition and that the proposition is getting stronger over time.
Policy Implications
•The Palma Ratio is a new policy relevant measure of consumption or income inequality that can complement other mea-
sures of inequality used by policy makers.
•The traditional measure for tracking inequality, the Gini, may be misleading policy makers as it is relatively insensitive at
the extremes and over sensitive to changes in the middle.
•Policy makers instead need to track what is happening at the top and the bottom of the distribution –the richest 10 per
cent and poorest 40 per cent.
•Policy-relevant measurement issues need more attention such as the gathering of tax data on top incomes and efforts to
estimate and analyse illicit financial flows.
The Gini coefficient remains the dominant measure of
income or consumption/expenditure inequality. However,
interest has emerged in tracking top incomes (and in some
cases adjusting the Gini with these), most notably in the
work of Emmanuel Saez, Thomas Piketty and Tony Atkinson
and others at the World Top Incomes Project who have sought
to track these, through tax records (see Alvaredo et al.,
2014). An alternative approach to tracking changes in
inequality related to the top incomes in society is that of Jos
e
Gabriel Palma (2006, 2011, 2013, 2014a, 2014b). Palma has
argued empirically that changes in inequality are currently
determined by the richest 10 per cent and the poorest 40
per cent because the population in-between (deciles 5–9)
hold a relatively stable half of gross national income (GNI)
irrespective of country and time (relative that is to the stabil-
ity of the shares to the poorest 40 per cent or the top 10 per
cent). Based on this proposition, the Palma Ratio of income
or consumption concentration is a measure of the capture of
total income or consumption of the richest decile over the
capture of the poorest 40 per cent.
Policy-related interest (meaning citation and usage) in
making use of the Palma Ratio has grown over the last few
years. Indeed, data for the Palma Ratio is now listed and
updated as a standard measure of inequality in the OECD
Income Distribution database (see Cingano, 2014 and OECD,
2014) and the annual UNDP Human Development Report
and World Bank Global Monitoring Report (see UNDP, 2015;
World Bank, 2015), as well as by some national statistical
offices.
In this article we revisit earlier assessments and argue
that across a range of tests that data not only supports
the Palma Proposition but that the proposition is getting
stronger over time.
1
We also discuss the theoretical and
empirical questions and implications arising from the
Palma Proposition for future exploration. The paper is
structured as follows: section 1 discusses long standing
theoretical and methodological issues in inequality mea-
surement. In section 2 we revisit and expand a set of
tests on the Palma Proposition that is the basis of the
Palma Ratio. In section 3 we discuss theoretical and
empirical questions arising. Section 4 concludes.
1. Inequality measurement
Theoretical issues
Measuring income and consumption inequality has a long
history. There are a set of axioms for inequality measure-
Global Policy (2016) 7:1 doi: 10.1111/1758-5899.12320 ©2016 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 7 . Issue 1 . February 2016 25
Research Article
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