Palma RatioEdit
The Palma ratio is a compact indicator of income distribution that has gained prominence in policy discussions because it focuses on the ends of the distribution—the people at the very top and those at the bottom—rather than treating inequality as a single, uniform spectrum. Named after Spanish economist Gabriel Palma, the ratio compares the share of income going to the top 10% of earners with the share going to the bottom 40%. Formally, Palma ratio = (income share of the Top decile) / (income share of the Bottom 40%). A higher value signals a larger gap between the fortunes of the top and bottom segments of the population, while a lower value implies a more balanced distribution.
The appeal of the Palma ratio lies in its simplicity and robustness. Because it concentrates on the two extreme groups, it tends to be less sensitive to measurement noise in the middle of the distribution and can be compared across countries with different statistical practices. This makes it a convenient complement to other measures of inequality such as the Gini coefficient and various measures of wealth and income distribution. In international analyses, the Palma ratio is often used to assess whether growth is translating into improved outcomes for the majority or whether gains are accruing primarily to a small share at the top.
Definition and calculation
- The denominator is the income share of the bottom 40% of households (or individuals, depending on data source).
- The numerator is the income share of the top 10% of households.
- The ratio is interpreted as the relative burden or advantage borne by the extremes of the income distribution.
The concept captures a simple intuition: when the top earns a larger slice of income while the bottom sees only a small slice, the ratio rises; when the bottom’s slice grows and the top’s slice contracts, the ratio falls. Because total income sums to 100%, changes in the numerator and denominator reflect distributional shifts across the ends of the spectrum rather than just changes in overall growth.
In practice, researchers and policymakers apply the Palma ratio to national accounts data, household surveys, and tax records. Data definitions (pre-tax vs. after-tax income, market income vs. disposable income) can affect the measured value, so many analyses explicitly state the data source and income concept used. Income inequality researchers often present Palma alongside other indicators to convey a fuller picture of distributional dynamics.
Interpretation, relevance, and comparisons
From a policy perspective, the Palma ratio emphasizes two potentially tractable levers for improving distribution: boosting the income share of the bottom 40% and/or restraining excessive concentration at the top. This framing can influence the discussion of tax policy, education and labor-market reforms, and targeted social programs. Proponents argue that a lower Palma ratio signals a healthier middle class and a broader base of consumer demand, which in turn supports sustainable growth. Critics note that focusing on the extremes may overlook movements within the middle of the distribution or the experiences of middle-class households near the bottom.
Compared with the Gini coefficient, the Palma ratio is often considered more interpretable and less sensitive to the precise shape of the middle of the distribution. However, it is not a complete substitute for a full distributional analysis. For example, a country could experience a fall in the Palma ratio while the middle class remains stagnant if bottom incomes rise modestly and top incomes fall somewhat; or, conversely, significant gains for the bottom 40% could accompany a surge in top incomes that complicates the interpretation. See how different measures can tell complementary stories about economic inequality and income distribution.
Applications and empirical patterns
In many advanced economies, the Palma ratio has moved in different directions over the past several decades. Some countries have seen stabilization or modest declines in Palma ratios as incomes for the bottom 40% improved and top-income shares did not rise as rapidly. In other regions, notably parts of Latin America and Sub-Saharan Africa, Palma ratios have shown more pronounced increases, signaling a widening gap between the fortunes of the top earners and those at the bottom. Analysts frequently cite these patterns in debates about growth strategies, public finance, and the design of social programs. For country-specific analyses, see studies that compare the Palma ratio across years and cohorts, as well as cross-country comparisons that test whether growth translates into improved outcomes for the majority. See the broader literature on economic development and public policy for context.
Critics from various angles have offered cautions about relying on the Palma ratio alone. Some argue that it can obscure changes that matter for living standards within the middle of the distribution or for households near the bottom of the income ladder. Others point out data quality issues, such as differences in income definitions (pre-tax vs. post-tax, market vs. disposable income) and in survey methodologies. In response, proponents maintain that the Palma ratio is a transparent, easy-to-interpret signal that, when used alongside other indicators, helps illuminate whether policy reforms are delivering tangible gains for most citizens rather than just for a few at the top. Critics of broad redistribution arguments contend that aggressive taxation or unproductive exchange of tax revenue can dampen incentives and growth, potentially harming the same households the ratio aims to help. Advocates of market-led growth reply that durable improvements in bottom shares come most reliably from higher living standards generated by a dynamic economy, better education, and better institutions, rather than from static redistribution alone.
Economic historians and policy observers sometimes reference the intuition behind the Palma ratio when evaluating reforms. If a country pursues policies that expand opportunity, reduce friction in labor markets, and invest in productivity, some expect a gradual improvement in the bottom 40% share and a stabilization or modest reduction in the top 10% share, translating into a more favorable Palma ratio over time. See economic growth and tax policy for linked discussions of how fiscal and structural policies influence distributional outcomes.