The Lorenz curve and its role in the economy

The Lorenz curve is a graph that demonstrates the extent of the existing inequality in the society, the industry of distribution of income and wealth.

In the late 19th century and early 20th century , income inequality was the object of research by many leading economists in Western Europe and America. The main problem of the study was the evaluation of the effectiveness and fairness of the distribution of wealth and income that emerged in a market economy. In 1905, Max Lorenz, an American statistician, developed his own way of estimating the distribution of income, which became known as the "Lorentz curve."

On the chart, the abscissa represents the proportion of the country's population as a percentage of the total number, and the ordinate represents the share of revenues as a percentage of total income. From the graph it can be seen that inequality in the division of incomes invariably exists in society. For example, the first 20% of the country's population receive only 5% of income, 30% of the population - 10% of income, 50% - 25% of income and so on. The Lorenz curve shows the share of income attributable to different population groups, formed by the size of the income received.

In the event that there was a uniform distribution of income in the society, then the curve would be straight (the bisector of the angle between the abscissa axis and the ordinate axis). This line is called absolute equality. Absolute equality is possible only in theory. This straight line shows that any certain percentage of families will receive an appropriate percentage of income. That is, if 20%, 50%, 70% of the population get 20%, 50%, 70% of the total income, then the corresponding points are located on the bisector. And in the event that all the income was accounted for by 1% of the country's population, then on the chart this situation would be reflected by a vertical line - absolute inequality. Thus, the Lorentz curve allows you to compare the distribution of income between different population groups or at different time periods.

Based on the graph, the Ginny coefficient is derived. Thus, the Lorentz curve and the Gini coefficient are closely interrelated.

The Gini coefficient is a quantitative measure that reflects the degree of inequality of different income distribution options. The ratio was developed by Corrado Gini, an Italian economist, demographer and statistician.

The less the income is evenly distributed, the closer the Gini coefficient to unity will be. The unit corresponds to the absolute inequality. Accordingly, the more uniform the distribution, the coefficient will be closer to zero. Zero corresponds to absolute equality. Transfer payment systems and progressive taxation are able to approximate the distribution to the line of absolute equality. As the experience of developed countries shows, over time inequality in the distribution of income is reduced.

Another of the commonly used indicators of income distribution is the decile coefficient. It shows the ratio between the averaged income of ten percent of the country's highest paid population and the averaged income of ten percent of the least well-off.

The Russian transition economy of the 1990s was characterized by a tendency to increase income differentiation. At the end of 1991, the decile coefficient was 5.4, in 1995 it increased to 13.4, and in 1998 to 13.5. The Gini coefficient rose to 0.376 in 1998 from 0.256 in 1991. Differentiation of incomes, as a rule, is accompanied by a difference in the remuneration of workers in certain industries and spheres of activity. Interprofessional and sectoral differentiation of payment levels in a market economy shows the public utility of activities, is a guide to employment, and training.