The Lorenz curve is a graph that demonstrates the degree of inequality in the distribution of income and wealth existing in society.
In the late 19th and early 20th centuries , income inequality was the subject of research by many leading economists in Western Europe and America. The main problem of the study was the assessment of the effectiveness and fairness of the distribution of wealth and income prevailing 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 "Lorenz curve."
On the graph along the abscissa axis, the share of the country's population as a percentage of the total number is plotted, and on the ordinate axis, the share of income as a percentage of total income. The graph shows that in society there is always inequality in the division of income. For example, the first 20% of the country's population receives 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 groups of the population formed by the size of the income received.
In the event that a uniform distribution of income were observed in society, then the curve would be a straight line (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 specific percentage of families will receive an appropriate percentage of income. That is, in the event that 20%, 50%, 70% of the population receive respectively 20%, 50%, 70% of total income, then the corresponding points are located on the bisector. And in the event that all income was accounted for by 1% of the country's population, then on the graph such a 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 displayed. Thus, the Lorentz curve and the Gini coefficient are closely related.
The Gini coefficient is a quantitative indicator that reflects the degree of inequality of different income distribution options. The coefficient was developed by Corrado Gini, an Italian economist, demographer and statistician.
The less evenly the incomes are distributed, the closer the Gini coefficient will be to one. The unit corresponds to absolute inequality. Accordingly, the more uniform the distribution, the coefficient will be closer to zero. Zero corresponds to absolute equality. Transfer payment and progressive taxation systems can bring distribution closer to the line of absolute equality. As the experience of developed countries shows, over time, inequality in the distribution of income decreases.
Another of the quite often used indicators of the distribution of income is a decile coefficient. It shows the relationship between the average income of ten percent of the country's highest paid population and the average income of ten percent of the least well-off.
The Russian transition economies of the nineties was characterized by a trend of increasing income differentiation. At the end of 1991, the decile ratio was 5.4, in 1995 it rose to 13.4, and in 1998 to 13.5. The Gini coefficient increased to 0.376 in 1998 from 0.256 in 1991. Differentiation of income, as a rule, is accompanied by a difference in the remuneration of workers in individual industries and fields of activity. Interprofessional and industry differentiation of wage levels in a market economy shows the social usefulness of the activity, is a guideline for employment, as well as training.