Transparency FAQ

Why does the index put an equal emphasis on income and wealth?

There are several reasons for this. First, in order to properly analyze income inequality, it is critical to decompose total income into two categories of income flows: income from labor and income from capital. The latter category has played an important role in the rise of inequality in recent decades—and an even bigger role if we look at the evolution of the distribution of income in the very long run.

Next, one of our key goals is to relate macroeconomic issues—such as capital accumulation, the aggregate structure of property, privatization or nationalization policies, and the evolution of public debt—to the microeconomic study of inequality. Far too often, the study of the “capital” side of the economy (that is, focused on capital, investment, debt, and so forth) is separated from the study of the “household” side (that is, looking at wages, transfers, poverty, inequality, and other issues).

What about consumption data?

We should make clear, however, that a lot of progress needs to be made before we can present a fully integrated approach. Doing so requires careful measurement not only of the inequality of pre-tax and post-tax income, but also of the distribution of saving rates across the different deciles of the distribution of pre-tax income. The combination of series on the distribution of pre-tax and post-tax income, savings, and wealth will also allow us to relate in a systematic manner the inequality of income, wealth, and consumption (that is, income minus savings).

In our view, however, it would be a mistake to overemphasize the consumption perspective, as the literature on inequality and poverty has sometimes done. Consumption is obviously a very important indicator of wealth, particularly at the bottom of the distribution. The problem is that the household surveys routinely used to study consumption inequality tend to underestimate the consumption, income, and wealth levels reached by the top of the distribution. Also, the notion of consumption is not always well defined for top income groups, which typically save very large proportions of their income. They choose to do so partly in order to consume more in later years, but more generally in order to consume the prestige, security, and economic power conferred by wealth ownership. In order to develop a consistent and global perspective on economic inequality—that is, a perspective that views economic actors not only as consumers and workers but also as owners and investors—it is critical, in our view, to put equal emphasis on income and wealth.