Measuring the Distribution of Household Income, Consumption and Wealth: State of Play and Measurement Challenges

This paper focuses on the data challenges encountered while measuring vertical economic inequality, i.e. inequality of income and consumption, and-whenever feasible-wealth, among households or individuals ranked by the level of their economic resources. The paper presents a critical assessment of international databases on inequality. Among the worrisome facts is that international databases not only show different levels of inequality but, for some countries (especially in Sub-Saharan Africa), diverging trends also. A key factor behind the limitations of existing databases is the quality of the underlying household surveys (microdata) used as inputs for their construction. Among the salient challenges is that household surveys suffer from undercoverage and underreporting of top incomes, i.e. the "missing rich". Missing the rich introduces a bias in the measured inequality indicators, a bias that could go in either direction. Another limitation in existing inequality indicators is that the typical welfare metrics are disposable income and/or consumption expenditures; these, however, take into account only part of the effect that taxes and transfers have on people's economic well-being. The paper suggests that a more comprehensive assessment needs to use an income variable that includes social transfers in-kind (especially education and health), and adds the effect of consumption taxes and subsidies as well.