Palma ratio

Palma ratio
Name	Palma ratio
Type	Income distribution indicator
Developed by	Gabriel Palma
Introduced	1960s (formalized 2000s)
Formula	Ratio of top 10% income share to bottom 40% income share
Related	Gini coefficient, Theil index, Atkinson index

Palma ratio The Palma ratio is an income-distribution indicator that expresses inequality as the ratio of the income (or consumption) share of the top decile to that of the bottom two quintiles. The measure was popularized by Gabriel Palma and has been applied by researchers in comparative studies across countries and regions such as OECD members, Latin America, and Sub-Saharan Africa. It is used alongside established measures produced by institutions like the World Bank, the IMF, and the United Nations.

Definition and Formula

The Palma ratio is defined as the quotient of the aggregate share of income accruing to the top 10% of households divided by the aggregate share accruing to the bottom 40% of households. The formula can be expressed compactly as P = S_top10 / S_bottom40, where S_top10 is the income share of the top decile and S_bottom40 is the income share of the bottom two quintiles. The statistic is often computed from household survey microdata compiled by agencies such as the World Bank’s World Development Indicators or the LIS database and is reported in cross-country datasets by research centers like the CEPR.

History and Development

The analytical roots of the Palma idea trace to debates in the mid-20th century about functional and personal income distribution, involving scholars such as Simon Kuznets, Amartya Sen, and Anthony Atkinson. Gabriel Palma formalized the specific ratio in the 2000s after observing that middle-income shares are relatively stable across many countries, a pattern previously documented in studies by teams at institutions including the UNDP and the OECD. The Palma gained traction through publications in venues linked to Cambridge University Press and working papers circulated by Harvard University and University of Cambridge researchers.

Interpretation and Use

Interpreting the Palma ratio emphasizes relative exposure of lower-income groups to top-end concentration. A Palma value of 1 indicates that the top 10% receives the same share as the bottom 40%; values above 1 indicate greater concentration at the top. Policymakers and analysts from organizations such as the European Commission, the IDB, and national finance ministries use the metric to frame redistributive debates alongside indicators produced by the OECD and the World Bank. Comparative studies employ the Palma to assess the impacts of reforms tied to episodes such as the Washington Consensus, structural adjustments promoted by the IMF, or fiscal changes in countries like Brazil, Chile, and Sweden.

Comparison with Other Inequality Measures

Compared with the Gini coefficient, the Palma focuses explicitly on top and bottom shares rather than the entire distribution, making it more sensitive to changes at the extremes observed in episodes like the post-1980s era in United States and United Kingdom. Relative to entropy-based measures such as the Theil index, and welfare-sensitive metrics like the Atkinson index, the Palma provides a simple, interpretable ratio similar in spirit to percentile-based indicators including the 90/10 and 90/50 ratios used by research groups at the OECD and Brookings Institution. Major datasets and research centers—LIS, World Bank, CEPR—often report multiple measures, enabling cross-validation between Palma and alternatives.

Advantages and Limitations

Advantages: the Palma’s simplicity aids communication to policymakers in bodies such as the European Parliament and the United Nations General Assembly; it highlights redistributive concerns relevant for fiscal policy debates in parliaments like the UK House of Commons or the United States Congress; and it is robust when middle-income shares are stable, as noted by scholars at Oxford University and Harvard Kennedy School. Limitations: it ignores distributional changes within the top 10% or within the bottom 40%, which researchers at Princeton University and Yale University have criticized; it can be sensitive to measurement error in survey data collected by national statistical offices such as IBGE (Brazil) or INDEC (Argentina); and it does not capture non-income dimensions emphasized by Amartya Sen or the Human Development Report series.

Applications and Empirical Findings

Empirical applications of the Palma include cross-national trend analysis by the World Bank and policy evaluation in cases like Chile’s pension reforms, Brazil’s conditional cash transfer programs, and redistribution debates in South Africa. Studies published in journals associated with Cambridge University Press and research outputs from CEPR report strong increases in Palma values during periods of rising top-income shares in countries such as the United States and Mexico since the 1980s. Regional analyses by the Inter-American Development Bank and the ECLAC document higher Palma ratios in parts of Latin America relative to many OECD countries, a pattern examined in comparative work at Harvard University and London School of Economics.

Methodological Considerations

Computing the Palma requires choices about data sources (household surveys versus national accounts), equivalence scales developed by demographic researchers at institutions like the UNFPA and weighting conventions used by statistical agencies such as Eurostat. Top-income shares often rely on tax data compiled by revenue authorities like the IRS or HMRC, which can produce different Palma estimates than survey-only approaches used by LIS. Researchers must address sampling error, nonresponse bias, and top-income underreporting through methods advanced by economists at Stanford University and Columbia University, and reconcile series across revisions like those published by the World Bank and IMF.

Category:Income distribution measures