Do Economics Students Under- or Overestimate Income Inequality

This paper reports on a novel variation on an interactive classroom exercise aimed at getting students to think about and estimate levels of income inequality in the United Kingdom and globally. Existing inequality elicitation procedures usually require participants to put amounts or percentages to different points in the distribution. The current exercise reverses the direction and asks participants to estimate where various salary amounts are located in the income distribution. This approach is inspired by the observation that in the real world, when thinking about the income distribution, we often start with a salary amount, and we compare this with the rest of the income distribution. Contrary to the majority of the previous literature, which finds systematic underestimation of inequality, results (n=30) indicate that students overestimate inequality. For most income levels, respondents placed salary amounts lower in the distribution than they actually sit, implying a belief that high incomes are more prevalent than they are. The overestimation is especially pronounced in the global context. The paper further proposes a method for transforming the student's guesses into approximate Lorenz curves to facilitate visual comparison with actual distributions.