What Is Hoover Index?
The Hoover Index is a method of assessing the disparity in income within a specified population or geographical location. It aims to estimate and quantify income distribution concentration or dispersion level among individuals within a given population. It is also known as the Robin Hood index or the Schutz index.
The Hoover Index indicates the share of the total population’s income that can be redistributed to achieve the desired equality in income. It measures the cumulative proportion of the population against the cumulative proportion of received income. The index value ranges between 0 to 1. A value closer to 0 represents higher equality, while a value closer to 1 indicates higher income inequality.
Table of contents
- The Hoover Index is a statistical instrument that measures the income disparity within a specified population or an economy. It estimates the part of the total income that must be redistributed to achieve perfect income equality.
- This Index can be computed by plotting the cumulative proportion of the population against the cumulative proportion of received income on a graph. The difference between the resulting curve and the line of perfect equality indicated the index value.
- The Hoover Index value can range between 0 and 1. An index value closer to 0 represents lower income equality, whereas a value closer to 1 depicts higher inequality.
Hoover Index Explained
The Hoover Index, also known as the Robin Hood Index or the Schutz Index, is a statistical tool that measures income disparity within an economy. It aids in quantifying the existing income inequality within a given population or geographical area. It assists in estimating the degree of income distribution among individuals or households in a community.
The Hoover Index is a valuable instrument for economists, social scientists, and policymakers as it helps them understand and gain valuable insights into the income disparities within different societies or economies. It allows them to recognize the areas with higher income inequality and create policies to resolve the issue. Moreover, the policymakers can evaluate the effectiveness of the existing policies and track their progress over time by assessing the income disparity periodically.
Furthermore, it helps them understand the situation deeply, make well-informed decisions and interventions and implement measures to promote a more equitable distribution of wealth.
Income Inequality Metrics
The Income Inequality Metrics must possess the following attributes:
- Population independence: The income inequality estimation must be free from any assumption regarding the population size. The population size does not account for a contributing factor while measuring income disparity. Thus, an economy with a lower population cannot be considered more equal than one with a higher population.
- Transfer principle: The transfer principle idea suggests that if the income from a wealthy household is transferred to a low-income family, the estimated inequality level must not rise. Instead, the inequality degree must decrease as an activity was performed to effectively minimize the income gap and achieve income equality in the community. This concept is also known as the Pigou-Dalton.
- Anonymity or Symmetry: The anonymity or symmetry premise signifies that the income inequality estimation must be based on income distribution and not on specific persons in the economy. For instance, let us assume there are two people in an economy named Amy and Clair. Amy owns 60% of the economy’s wealth, while Claire owns 40%. The inequality statistics must remain the same irrespective of whether Claire owns 40% wealth or Amy does. Thus, the estimation must depend on how the wealth is being divided and not on who the individuals are in the economy.
How To Calculate?
The Hoover Index value depicts the measure of the total income’s part that must be transferred from individuals who rank above the mean to those who rank below the mean. In this way, the entire community can bridge the gap in income disparities and achieve the desired income equality.
To determine the Hoover Index value, one must plot the cumulative proportion of the population on the x-axis and the cumulative proportion of income received on the y-axis on a graph. A perfectly equal income distribution would display a diagonal line from the bottom left to the top right.
The index value will be lower if the Lorenz Curve lies closer to the diagonal line, representing lower income inequality. However, if the curve deflects significantly from the diagonal line, it signifies higher income inequality and a higher index value. The Hoover Index is computed as the area between the plotted curve and the diagonal line indicating perfect equality.
Hoover Index vs Theil Index
The differences between the Hoover and Theil indices are as follows:
- Hoover Index
- This Index focuses on income concentration or the income distribution level among individuals or households.
- It quantifies the income disparity based on the cumulative proportion of income that different population segments receive.
- To determine the Hoover Index, the user must plot the cumulative proportion of the population against the cumulative proportion of received income. The area between the resulting curve and the line of perfect equality will provide the index value. This index value ranges from 0 to 1, where a value closer to 0 signifies a more equal income distribution, while a value closer to 1 depicts greater income inequality.
- Theil Index
- This Index measures income inequality on the basis of entropy, which is a concept that reflects the disorder level in the income distribution.
- It compares the entropy of the actual income distribution and the entropy of a perfectly equal distribution.
- The Index can be estimated by summing the differences between the income of each individual and the mean income and then dividing the sum by the total population. The Theil Index value ranges from 0 to positive infinity. A value of 0 indicates perfect equality, and an increasing index depicts increasing inequality.
Frequently Asked Questions (FAQs)
The Hoover Index has some limitations. It focuses solely on income distribution and does not account for other inequality attributes like wealth disparities or social inequalities. Moreover, it does not comprehensively analyze the income disparity among certain demographic or socioeconomic groups. Additionally, it may fail to capture the full complexity of inequality patterns in the income distribution curve.
The Hoover Index measures income inequality by plotting the cumulative proportion of the population against the cumulative proportion of received income. It differs from other income inequality measures, primarily focusing on income concentration. Other metrics, like the Gini coefficient, Theil Index, and the Palma ratio, provide a different perspective on income inequality as they capture various income distribution aspects. All the income inequality metrics offer complementary insights into the inequalities in income distribution.
The Hoover Index is valuable for policymakers in various ways. It offers a quantitative income inequality measure that enables policymakers to examine the income concentration among a particular population or region. Policymakers can thus identify areas or groups with higher inequality levels and generate policies addressing the income disparities. Furthermore, they can aim to promote more equitable wealth distribution methods.
This has been a guide to what is Hoover Index. Here, we explain how to calculate it, its differences with the Theil index, and the income inequality metrics. You can learn more about it from the following articles –