In The US, there are large regional cost of living differences. For example, the cost of living in San Francisco is much higher than living in Des Moines. Local wages reflect these regional variations and cause the Gini coefficient to rise. In both cities, residents may have an equal standard of living and the Gini in each city could be low, but produce a higher Gini when the two populations are combined. EU countries are much smaller and have a much lower regional cost of living variation than the US. The Gini for the entire EU, without making adjustments for other problems discussed below, gets much closer to the US Gini. I believe .37 for the entire EU versus .46 for the US. It would be even closer if the adjustments discussed below were made.

Since Gini coefficients are computed using income at a point in time and not lifetime income, countries, like the US, with a higher number of new entrants into the workforce, due to immigrants, graduating students, mothers returning to the workforce, etc., will produce a higher Gini. A higher replacement birth rate, such as in the US versus some EU countries, raises the Gini number.

Likewise, there will be a higher Gini, if there are more opportunities to increase one\’s income over one\’s lifetime in a country, such as in the US, through business ownership, additional education, job promotions, experience, etc.

Investment income is not included in international Gini numbers. Retirees and others using investment income, make the Gini look higher in their countries. In countries with greater reliance on government retirement pensions, the Gini will be lower, especially if the government funds are counted as income.

Some countries count government transfers and benefits as income, e.g. France. However, the US does not. Also, some countries give money as benefits, which count as income, while other countries give goods or vouchers (food stamps, etc.), which do not count as income. The US Gini is higher than in EU and other countries that count their government programs as income or give cash.

The number of income data points influences the Gini coefficient. A country that measures its income distributions at quintiles (every 20 percent) will likely produce a different Gini number usually lower) than if it measured its income distribution at every 5 percent level.

Similarly, household Gini is lower than individual Gini in a country. Gini depends on whether one looks at household versus individual income.

The most troubling aspect of the Gini coefficient is that it makes the natural distribution of income and wealth in a country look bad. Income, wealth and many other of life\’s happenings follow a power law distribution. It is called a Pareto Distribution after his economic observations of this distribution.

It is more commonly known as the 80-20 or 70-30 rule. Many things in life approximate this type of distribution. Twenty percent of criminals cause eighty percent of crimes; twenty percent of drivers cause eighty percent of accidents; people wear twenty percent of their clothes eighty percent of the time; twenty percent of a company\’s customers account for eighty percent of sales, etc.

Income and wealth naturally follow an 80-20 rule. Twenty percent of people produce 80 percent of the income and wealth in a country. In a capitalistic society, with few limitations on individual advancement, education and entrepreneurship, income will follow an approximate 80-20 rule or Pareto distribution.

Economically free countries naturally will approximate the 80-20 rule and will produce a higher Gini coefficient than countries that restrict and limit economic advancement and entrepreneurship. A typical power law (Pareto distribution) for 80-20 percent income in a country will produce a Gini that seems high, about .35 to .5 than in countries that limit advancement and business opportunities.

A relative from a Soviet bloc country emigrated to New York about 25 years ago. He was a Moscow educated urologist — chief of staff of a large hospital. Here he had low level job in a hospital and lived in a working class apartment in Brooklyn. Yet he was the most upbeat person I’d every talked to.

He was fascinated with everything. He couldn’t believe that everybody could afford to have cars, appliances, nice clothes, etc. Everybody in his country thought the American life style they saw on television and in the movies was propaganda and that we really weren’t better off than they.

When I said I was sorry he didn’t live in a nicer neighborhood, he said with great emotion, that I didn’t understand. His apartment was like a palace compared to his apartment in his home country where everything was dirty and dreary and all the people were hopeless.

You know, the kind of place where the Canadian student quoted in the first paragraph would have been delighted with the Gini coefficient.

Now that’s what you get in the world’s most equal society if you utter a view like this.

Btw – the Danish Gini-coefficient was 24,7 (USA: 40,8) in 2006 and average GDP per citizen was 35,125 PPP USD (USA: 43,968 PPP USD). I wouldn’t mind a slightly different tradeoff than that, myself.

Joseph Schumpeter