Friday, September 16, 2011

The Shrinking Middle Class and the Gini coefficient

In this WSJ article, Ellen Byron proves to sceptical economics students that businesses actually do use Gini coefficients. Gini coefficients are a handy measure of how evenly income is distributed in a country. A Gini coefficient of 0 would indicate everyone in the country has exactly the same income. A Gini coefficient of 1 would indicate one person collects all income. The U.S. is in the middle of the global rankings. Almost all countries in Central and South America and Sub-Saharan Africa have more income inequality. China also has more income inequality - primarily due to its rural/urban divide. European countries and Canada have had less income inequality than the U.S., but that may change as many governments are forced to cut back on spending.

The article points out that the U.S. Gini coefficient has been growing in the current recession, and suggests that it is likely to stay higher. This shrinking of the middle class is forcing many companies like Proctor and Gamble to change strategies. 

Questions for students: 
1.  Have you observed this phenomenon in your company's industry?
2.  If so, has your company changed its target consumer or altered its marketing/production strategies in response to these changes?
3. Do you think this a problem? Should policy makers address this shift? If so, how?

For the curious, here is a nice graph demonstrating the Gini coefficient (thanks to Wikimedia Commons). 

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