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Some universal patterns in income distribution: An econophysics approach

A. Shaikh

Published 2022 in Metroeconomica

ABSTRACT

This paper utilizes the econophysics "two class" (EPTC) approach to income distribution to derive certain empirical rules applying to all countries in the comprehensive World Income Inequality (WIID) database. This approach demonstrates that wage incomes follow an exponential distribution while property incomes follow a Pareto distribution, which leads to a simple and empirically robust approximation to the Lorenz curve. We in turn show that the per capita income of any bottom fraction (x) of the population is proportional to “inequality adjusted GDP per capita”, i.e. to (GDP per capita).(1-Gini), the constant of proportionality a(x) being solely a function of population fraction under consideration. This proposition is empirically robust across countries and over time in our large database. We focus on two patterns. The “1.1 Rule” in which the income per capita of the bottom 80 percent of a country's population, what we call the Vast Majority Income, can be calculated in every country as 1.1(GDP per capita).(1-Gini). Using the VMI in place of GDP per capita gives rise to different country rankings. Secondly, the “1.0 Rule” in which the per capita income of the bottom 70 percent is directly equal to inequality adjusted GDP per capita. Sen (1976) uses traditional welfare theory to arrive at inequality adjusted GDP per capita as a measure of social welfare while we use EPTC to arrive at it as a measure of the per capita income of the bottom 70 percent.

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