Statistical methods for empirical analysis of income distributions within a normative framework

Assessing inequality, poverty, and related normative issues in income distribution is not a purely statistical exercise, since it requires invoking norms governing social preferences. Social decision-makers’ attitudes toward inequality are decisive in shaping the distribution of disposable income. Applied welfare economics has developed various quantitative measures of aversion to inequality that characterise the attitudes in question. The problem of great theoretical and practical importance is how to recover the levels of these measures from the empirically observed distributions of incomes. This paper offers the answer to this question. The paper proposes statistical methods for estimating aversion to income inequality, to rank inequality, and the equivalence scale. The methods are applied to assess equivalence scales, inequality, social welfare and poverty in 27 countries of the European Union in 2021. The empirical results reveal new phenomena and allow the specification of normative standards for international assessments of income distributions.