The Lorenz Curve

The Lorenz Curve

The Lorenz Curve provides a method of displaying the distribution of income or wealth within an economy. The Lorenz Curve was developed by Max O. Lorenz in 1905 as a way of representing wealth distribution.

  • The Lorenz Curve displays the cumulative share of income from various sections of the population.
  • If perfect equality were to exist (if everyone had the same salary), the poorest 20% of the population would then gain 20% of the total income. Meanwhile, the poorest 60% of the population would receive 60% of the income. 

Diagram of The Lorenz Curve

In the Lorenz Curve above, the poorest 20% of households only have 5% of the total income of the nation. Meanwhile, the poorest 90% holds 55% of the total income, leaving the richest 10% with 45% of the total income. 

A Shift in the Lorenz Curve

In the example above, a reduction in inequality has taken place. You can see that the Lorenz Curve has moved and is now closer to the line of equality. Now, the poorest 20% have 9% of the total income, and the richest 10% receive 25% of the total income.

The Lorenz Curve and the Gini Coefficient

The Gini Coefficient is another measure of inequality, and you can use the Lorenz Curve to calculate it. Area A/A+B is the Gini Coefficient.

Area A becomes smaller the closer the Lorenz Curve is to the line of equality. The Gini Coefficient will be low in this situation. But if there’s a high degree of inequality, area A will take up a larger percentage of the total area. 

When the Gini Coefficient rises, it shows a rise in inequality. It shows that the Lorenz Curve is further from the line of equality.

The Lorenz Curve and Wealth

In the Lorenz Curve, you can see the cumulative wealth of each of the wealth deciles. For instance, it shows that the lowest 38% of people have zero property wealth. The top 10%, however, own almost 50% of the property wealth. 

When you look at financial wealth, the inequality is even greater. 60% of the population is in debt and has negative wealth. At the same time, the top 10% has 80% of the nation’s financial wealth. 

The Gini Coefficient in the UK

Here you can see that the UK has experienced a rise in inequality since 1979. This is especially apparent during the 1980s. 

The Original Lorenz Curve

The very first Lorenz Curve had the percentage of population and percentage of total income on opposite axes.