Top Incomes and Inequality Measurement: A Comparative Analysis of Correction Methods Using the EU SILC Data

47 Pages Posted: 2 May 2018 Last revised: 26 Jul 2018

See all articles by Vladimir Hlasny

Vladimir Hlasny

Ewha Womans University; United Nations Economic and Social Commission for Western Asia (UN-ESCWA)

Paolo Verme

World Bank Group; University of Turin - Department of Economics

Date Written: April 2, 2018

Abstract

It is sometimes observed and frequently assumed that top incomes in household surveys worldwide are poorly measured and that this problem biases the measurement of income inequality. This paper tests this assumption and compares the performance of reweighting and replacing methods designed to correct inequality measures for top income biases generated by data issues such as unit or item nonresponse. Results for the European Union’s Statistics on Income and Living Conditions survey indicate that survey response probabilities are negatively associated with income and bias the measurement of inequality downward. Correcting for this bias with reweighting, the Gini coefficient for Europe is revised upwards by 3.7 percentage points. Similar results are reached with replacing of top incomes using values from the Pareto distribution when the cut point for the analysis is below the 95th percentile. For higher cut points, results with replacing are inconsistent suggesting that popular parametric distributions do not mimic real data well at the very top of the income distribution.

Keywords: Top Incomes, Inequality Measures, Survey Nonresponse, Pareto Distribution, Parametric Estimation, EU SILC

JEL Classification: D31, D63, N35

Suggested Citation

Hlasny, Vladimir and Verme, Paolo, Top Incomes and Inequality Measurement: A Comparative Analysis of Correction Methods Using the EU SILC Data (April 2, 2018). Econometrics 6(2):30, June 2018., Available at SSRN: https://ssrn.com/abstract=3162773 or http://dx.doi.org/10.2139/ssrn.3162773

Vladimir Hlasny (Contact Author)

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750
Korea, Republic of (South Korea)

United Nations Economic and Social Commission for Western Asia (UN-ESCWA) ( email )

P.O. Box 11-8575
Riad el-Solh Square
Beirut, Lebanon 10000
Lebanon

Paolo Verme

World Bank Group ( email )

Washington, DC 20433
United States

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
63
Abstract Views
529
Rank
627,735
PlumX Metrics