Indicator 10.2 Gini coefficient of income after social transfers

Text from the Indicator Report 2022 

The Gini coefficient is a statistical measure of income inequality. It has a value between 0 and 1. The value 0 means that every person has exactly the same income whereas the value 1 indicates that only one person receives all the income, thereby representing a situation of maximum income inequality. Hence, the smaller the Gini-coefficient, the more evenly is the income distributed.

The equivalised income is a value derived from the total income of a household and the number and age of the people living from this income. With the help of an equivalence scale, the incomes are weighted according to household size and composition, as the shared use of living space and household appliances results in savings (Economies of Scale). With the equivalised income then allocated equally to each household member, it becomes possible to compare people’s incomes independently of age or household size. A household’s equivalised disposable income is the income, including social transfers, which remains after taxes and other deductions, and is therefore the income available for spending and saving. A distinction must be made between this measure and equivalised income before social transfers, which looks at disposable income without any possible welfare payments, such as unemployment benefit or housing assistance, or market income, which is calculated before taxes, social contributions and social benefits. In none of these ways of looking at income is a differentiation made between the sources of income, i.e. whether it takes the form of wages, rental income or capital gains.

The data used to calculate equivalised income come from the annual harmonised European statistics on income and living conditions (EU SILC) and are incorporated with extensive methodological changes into the microcensus due to increasing requirements on data with respect to actuality and provision of more detailed regional results in survey year 2020. Thus, the results from 2020 on are not comparable with previous years. Since EU-SILC is not yet drawn upon to calculate a Gini coefficient for market income, data from the German Socio-Economic Panel (SOEP) of the German Institute for Economic Research are used for this purpose. The fact that households with high income and extensive assets are under-represented in voluntary sample surveys is methodologically compensated for.

As in previous years, the Gini coefficient of the equivalised disposable income for Germany (2021: 0.309) almost equals that for the European Union (2021: 0.301). Thus, there are no significant differences in income distribution between Germany and Europe. In 2021, the Gini-coefficient of equivalised disposable income was above the respective value of the EU, such that the target of the Federal Government was missed. Furthermore, the Gini coefficient of the equivalised disposable income is well below the Gini coefficient of the equivalised disposable income before social benefits without pensions (0.309 as compared with 0.376). As expected, the Gini coefficient of market income was even higher at 0.497 (2019). In Germany, social benefits, social insurance and taxes thus contribute considerably to reducing inequalities in disposable income.

The wealth distribution figures for Germany are taken from the Household Finance and Consumption Survey (HFCS) conducted on an irregular basis by the European Central Bank and show a clear uneven distribution. Turning to the corresponding Gini coefficient (2017: 0.739), wealth in Germany is much less evenly distributed than income. The gap to the respective European value (Eurozone 2017: 0.695) is substantial and the European value is lower than the value for Germany. However, the impression of there being a disproportionately high wealth inequality is qualified by several factors not covered by the Gini coefficient. For instance, the evaluation of wealth does not take into account future pension entitlements. In addition, due to the stricter protectionof tenants’ rights, people in Germany are more likely to rent than own their homes, compared to other European countries.