Income inequality

Description:

This indicator uses the Palma ratio to measure income inequality. The Palma ratio divides the richest 10% of the population’s share of net household income by that of the poorest 40%.

Source of Data:

The data source is the Family Resources Survey (Households Below Average Income dataset). The unit of measurement is the individual.

Households Below Average Income is a National Statistics dataset owned by Department for Work and Pensions.

The indicator is published as part of the annual publication: Poverty and Income Inequality in Scotland. The publication can be accessed through the Income and Poverty website.

The Family Resources Survey is a sample survey including approximately 2,800 households in Scotland. The responses of these households are weighted and grossed up to be representative of all private households in Scotland.

Incomes are equivalised (to take into account household composition) using the modified OECD equivalence scale.

Once equivalised, weighted and grossed, the total income of every individual is summed to arrive at the total equivalised income figure.

As the data comes from a sample survey, all estimates are subject to sampling error. Due to the complex sampling framework the confidence intervals are difficult to calculate and are not currently available.

The measure represents a three-year rolling average.

Definitions:

Income is equivalised net disposable income before housing costs. This measure estimates income from all sources (including earnings, benefits, tax credits, pensions, and investments) after deductions for income tax, national insurance contributions, council tax, pension contributions and maintenance payments but before deductions for housing costs such as rent and/or mortgage payments. The data will be adjusted for inflation and presented in the most recent year's prices.

Equivalisation sums the income of all householders, adjusts it to reflect the size and composition of the household, and applies the resulting income to all householders. This is an adjustment made to household incomes that attempts to adjust for the fact that larger families require larger, but less than proportionally larger, incomes to achieve similar standards of living. For example, a couple would need a larger income than a single person to achieve a comparable standard of living, but they would not need double the income of the single person. The aim of equivalising household incomes is be able to make meaningful comparisons of household incomes for households of different sizes and compositions.

Deciles are created by ranking all individuals in private households by their equivalised incomes, then splitting them into ten evenly sized groups. The total equivalised income of the highest decile is summed and divided by the sum total of  the income of the lowest four deciles, to arrive at the “Palma” ratio: the ratio of income to the top 10% of households compared to the bottom 40%. This is expressed as a percentage, i.e. a Palma ratio of 112% means that the top decile has 12% more income than the bottom four deciles combined.

Criteria for Change:

  • Performance is improving if the indicator decreases for three periods in a row by at least 1 percentage point each period.
  • Performance is worsening if the indicator increases for three periods in a row by at least 1 percentage point each period.
  • Otherwise, performance is maintaining.

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