How Gini Coefficient Significantly Understates Inequality in Singapore

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31 October 2018

As we have just learned, one of the problems with looking at inequality using Gini coefficient is that the index can be calculated from different types of data. Depending on the data type used, Gini coefficient only provides a specific and narrow perspective of inequality.

 

How Gini Coefficient Understates Inequality in Singapore

(a)         Use of Households Wages in the Calculation of Gini Coefficient

To begin with, Singapore’s Gini Coefficient is calculated by the Department of Statistic (DOS) using only household wages. Even though there are merits in using total household earnings, the approach masks the actual wage gap between individuals especially when other benefits such as paid leave and health insurance, which can be substantial for the high-income earners, are also included. 

 

For example, there is seemingly no inequality between two similar households both earning a total wage of $10,000. But if Household A has only one wage earner while Household B has two, then the comparison based on individual wage earner will really be between $10,000 and $5,000 indicating a very substantial wage gap.

 

This is why, In the case of EU, Gini coefficient for wage inequality is calculated at the personal level using personal wage data. Gini coefficient for income inequality, on the hand, is calculated at the household level using pooled personal income data that combines wage and capital income.

(b)         Gini Coefficient Measures Relative Inequality but does not Reflect Absolute Inequality

 

Next, as a measure of relative inequality, Gini coefficient comes with a serious shortcoming: it does not reflect absolute inequality. As long as the incomes of the poor grow as fast as those of the rich, the Gini coefficient will remain unchanged over time, even though the difference in absolute income have changed significantly.

 

To illustrate, consider two individuals starting with wages $1000 and $2000 see their earnings grow to $4000 and $8000 respectively. Gini coefficient will remain the same because both see their wage increase to 4 times. Yet their wage gap has grown from the initial $1000 (i.e. $2000 - $1000) to $4000 ($8000 - $4000). So even though the individual with the higher wage experience a larger absolute raise and inequality gas in fact increased in absolute term, the unchanged Gini coefficient still concludes that growth remain inclusive.[1]

 

In short, because Gini coefficient is a good measure of relative inequality but does not reflect absolute inequality, it makes inequality seem less large. In other words, Gini coefficient is prone to misleading us into thinking that economic growth is more “inclusive” than it is. There is a distinct possibility that wage inequality may continue to worsen in absolute perspective even if Gini coefficient is maintained at the current level.

 

(c)          Gini Coefficient Measures Wage Inequality but not Income and Wealth Inequality

 

Finally, most importantly, concerns over Singapore’s state of social inequality should not be just about earning from work (i.e. wages) but also about income from capital investments as well as about wealth accumulation.

Since Gini coefficient is calculated by the DOS based only on earning from work, what is being tracked in Singapore is really only wage inequality but not the broader income inequality which, according to Piketty’s research, is likely to be much more pronounced today and in the future given the higher rate of investment return than wage growth. Furthermore, while capital gain is not taxed, wage is.

 

As for wealth inequality, given how much asset values have risen over the past decades, we can expect the gap in wealth distribution to be significant if not worse than wage and income inequality. And since Singapore does not charge inheritance tax, wealth is passed on without any redistribution.

 

Of the three types of inequality, wage inequality usually raises the most alarm because the pains for the households in the lower rungs are felt in the immediate instant. But over the longer term, inequality is accelerated by incomes from investments which households in the lower rungs have less means to do. Across generations, the unequal inter-generational transfers of wealth will magnify as wealth breeds more wealth. The unequal wealth distribution will inadvertently undermine social mobility and results in emergence of social classes.

 

Hence, if the timeline is projected long enough (says 50 to 100 years), the playing field will increasingly be tilt against young Singaporeans who are disadvantaged at birth by their parents’ lower education and income levels as well as ownership of assets. With a growing role played by inherited dynastic wealth, Singapore is poised for a future dominated by inherited aristocracy and what Picketty called patrimonial capitalism.

 

What makes income and wealth inequality even more worrisome is the fact that and it is evolving pretty much under the radar. While we closely track the movement of Gini coefficient to monitor wage inequality, there have been no systemic studies over time, whether by policymakers or academics, of the wealth gap in Singapore. No one can therefore put a finger on exactly how unequal income and wealth distribution really is here.

True Extent of Inequality: Not only Wage but also Income and Wealth

In short, while Gini coefficient is a useful indicator of inequality, there are serious limitations of using it to keep tab of the true state of inequality because 

  • the methodology and the choice of data used to calculate the index allows relative inequality to be deliberately understated

  • as a relative measures, it hides rapidly widening absolute inequality

  • it does not track income and wealth inequality thus understating the true extent of overall social disparity 

It is not possible to meaningfully address inequality if its true extent remains hidden. The first step towards genuinely tackling inequality in Singapore is therefore to map out a more accurate picture of not just wage but also income and wealth distributions. This tracking should be carried out consistently over time ideally by an independent institution with no vested interests rather than by the Department of Statistics.

 

Such an analysis, conducted with depth and breadth and consistently across a long timeframe using a broad range of data sets can help to piece together a more accurate picture than just the Gini-coefficient can. Until then, measures implemented to tackle social disparity at best merely alleviate the pains brought about by inequality while absolute wage gap remains understated and income and wealth gaps continue to widen under the radar because the contributing dynamics remained unreported and unrestrained

 PREVIOUS 02 Different Ways of Calculating Gini Coefficient Using Different Data

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REFERENCES

[1] See Robert H. Wade. (2013). “Our misleading measure of income and wealth inequality: the standard Gini coefficient.” TripleCrisis. 6 May, 2013.