Econometrica: Jul, 1983, Volume 51, Issue 4

The Influence of Classification and Observation Errors on the Measurement of Income Inequality

https://doi.org/0012-9682(198307)51:4<1093:TIOCAO>2.0.CO;2-R
p. 1093-1108

Aldi Hagenaars, Bernard van Praag, Wim van Eck

Income inequality as observed tends to overstate the true inequality. This is due to the fact that income observations are contaminated by measurement errors. On the other hand, the usual income classification tends to reduce observed income inequality. Without appropriate correction for both phenomena the value of comparing income inequality over various populations is dubious. In this paper the impact of both factors is assessed and a correction procedure suggested. Empirical evidence is provided on the basis of a large survey of Dutch families.