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graph of an increasing curve showing cumulative share of income earned versus cumulative share of people from lowest to highest income
Credit: BenFrantzDale

A Lorenz curve shows the distribution of income in a population by plotting the percentage y of total income that is earned by the bottom x percent of households (or individuals). Developed by economist Max O. Lorenz in 1905 to describe income inequality, the curve is typically plotted with a diagonal line (reflecting a hypothetical "equal" distribution of incomes) for comparison. This leads naturally to a derived quantity called the Gini coefficient, first published in 1912 by Corrado Gini, which is the ratio of the area between the diagonal line and the curve (area A in this graph) to the area under the diagonal line (the sum of A and B); higher Gini coefficients reflect more income inequality. Lorenz's curve is a special kind of cumulative distribution function used to characterize quantities that follow a Pareto distribution, a type of power law. More specifically, it can be used to illustrate the Pareto principle, a rule of thumb stating that roughly 80% of the identified "effects" in a given phenomenon under study will come from 20% of the "causes" (in the first decade of the 20th century Vilfredo Pareto showed that 80% of the land in Italy was owned by 20% of the population). As this so-called "80–20 rule" implies a specific level of inequality (i.e., a specific power law), more or less extreme cases are possible. For example, in the United States in the first half of the 2010s, 95% of the financial wealth was held by the top 20% of wealthiest households (in 2010), the top 1% of individuals held approximately 40% of the wealth (2012), and the top 1% of income earners received approximately 20% of the pre-tax income (2013). Observations such as these have brought income and wealth inequality into popular consciousness and have given rise to various slogans about "the 1%" versus "the 99%".

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