Gini Coefficient (after tax)

What Is the Gini Coefficient?

The Gini coefficient is the most widely used single-number summary of income inequality within a population. It condenses the entire distribution of income — from the poorest household to the richest — into a value between zero and one, where zero represents perfect equality (every person receives the same income) and one represents perfect inequality (one person receives all income and everyone else receives nothing). In practice, observed Gini coefficients for national income distributions typically fall between 0.25 and 0.60.

The measure was developed by the Italian statistician Corrado Gini in 1912 and has since become a standard tool in economics, public policy, and international development. Its appeal lies in its simplicity and universality: it can be applied to any distribution — income, wealth, consumption, land ownership — and it permits direct comparisons across countries and over time.

Despite its ubiquity, the Gini coefficient has important limitations. Two very different income distributions can produce the same Gini value, because the measure is insensitive to where in the distribution the inequality is concentrated. A society with a squeezed middle class and extreme tails can have the same Gini as one with a smooth, gently sloping distribution. For this reason, analysts often supplement the Gini with additional measures such as income-share ratios, percentile analyses, or the full Lorenz curve.

The Gini has also become a touchstone in public discourse, frequently cited in media reporting and political debate as shorthand for the fairness of economic outcomes. While it is a valuable summary statistic, it should be interpreted alongside other indicators rather than treated as a comprehensive verdict on a society's distributional health.

How It Is Calculated

The Gini coefficient is derived from the Lorenz curve, which plots the cumulative share of total income received by the bottom $x$ percent of the population against $x$. In a perfectly equal society, the Lorenz curve is a 45-degree line — the bottom 20 percent of the population earns 20 percent of total income, the bottom 50 percent earns 50 percent, and so on. In an unequal society, the Lorenz curve bows below the 45-degree line, and the degree of bowing reflects the extent of inequality.

The Gini coefficient equals twice the area between the Lorenz curve and the line of perfect equality:

$G = \frac{A}{A + B}$

where $A$ is the area between the 45-degree line and the Lorenz curve, and $B$ is the area under the Lorenz curve. Since $A + B = 0.5$ (the area of the triangle beneath the 45-degree line), this simplifies to:

$G = 2A = 1 - 2B$

For a discrete population of $n$ individuals with incomes $y_1 \leq y_2 \leq \ldots \leq y_n$, the Gini can be computed directly as:

$G = \frac{2 \sum_{i=1}^{n} i \cdot y_i}{n \sum_{i=1}^{n} y_i} - \frac{n + 1}{n}$

This formula ranks individuals from poorest to richest, weights each income by its rank, and normalises the result. In practice, statistical agencies compute the Gini from grouped or microdata using survey weights that account for sampling design.

Market versus Disposable Income

A critical distinction is whether the Gini is calculated on market income (before taxes and government transfers) or disposable income (after taxes and transfers). The market-income Gini captures the inequality generated by the labour market, capital ownership, and private pensions. The disposable-income Gini reflects the redistributive effect of the tax-and-transfer system.

The gap between the two measures indicates how much the state compresses the income distribution. In Scandinavian countries, this gap is large — the tax-and-transfer system reduces the Gini by 20 points or more. In less redistributive economies, the gap is smaller. Tracking both measures over time reveals whether changes in overall inequality are driven by market forces, policy choices, or both.

Sensitivity and Alternatives

The Gini gives equal weight to transfers at all points of the distribution. Alternative measures emphasise different parts: the Atkinson index allows the analyst to assign greater weight to inequality at the bottom, while the Palma ratio focuses on the ratio of income captured by the top 10 percent to that of the bottom 40 percent. These alternatives can be more informative for specific policy questions but lack the Gini's widespread recognition and comparability.

How to Read the Numbers

The table below offers an interpretive guide for the disposable-income Gini coefficient, which is the measure most commonly cited in policy discussions.

Changes over time are often more informative than the level. A rising Gini suggests that income growth is disproportionately accruing to higher earners or that the redistributive system is becoming less effective. A falling Gini may reflect broadening wage growth, expanded transfer programmes, or progressive tax reforms.

Movements of even two or three hundredths of a point over a decade are considered economically meaningful, because the Gini moves slowly in the absence of large policy or structural shifts. A jump of five hundredths in a short period would be exceptional and would signal a major disruption — a financial crisis, a dramatic policy change, or a structural shift in the labour market.

It is worth noting that the Gini is typically reported on a scale of 0 to 1 in academic research and on a scale of 0 to 100 in some policy publications. The underlying information is identical; only the notation differs.

Economic Significance

Income inequality matters for economic performance, social cohesion, and political stability. A large body of research explores the channels through which inequality affects growth, and while the findings are nuanced, several mechanisms are well established.

High inequality can constrain economic growth by limiting access to education and healthcare for lower-income households, reducing their productive potential. When a significant share of the population cannot invest in human capital because of credit constraints or inadequate public services, the economy forgoes output that those individuals could otherwise have generated. This is the opportunity-cost channel — inequality wastes talent.

Inequality also influences aggregate demand. Lower-income households tend to spend a larger share of each additional dollar of income than wealthier households do. A shift in income toward the top of the distribution can therefore reduce overall consumption and slow growth, unless offset by increased investment or exports. This demand channel has received renewed attention in the wake of the global financial crisis.

Politically, persistent or rising inequality can erode trust in institutions, fuel populist movements, and make it harder to build consensus for necessary but painful economic reforms. Social-cohesion research consistently finds that more unequal societies experience higher rates of crime, poorer health outcomes, and lower levels of social trust — all of which impose economic costs.

For policymakers, the Gini coefficient serves as a diagnostic tool. A government that observes a rising market-income Gini but a stable disposable-income Gini can infer that its tax-and-transfer system is successfully compensating for growing market inequality. Conversely, a rising disposable-income Gini signals that the safety net is not keeping pace.

Central banks, while not directly responsible for distributional outcomes, are increasingly aware that monetary-policy choices — particularly prolonged low interest rates that inflate asset prices — can widen wealth inequality and generate political backlash that complicates their mandate. The Gini coefficient provides one lens through which these distributional side effects can be monitored.

Related Indicators

• Poverty Rate — the share of the population below the poverty line, a complementary measure of deprivation
• Gender Wage Gap — the earnings differential between men and women, a specific dimension of inequality
• Average Hourly Earnings — the level and growth of wages, which drive market-income distribution
• GDP Per Capita — average output per person, which the Gini contextualises by revealing how that output is shared