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
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: Suggested Citation