How to Calculate the Hoover Index
Original post by Ben Taylor of Demand Media
The Hoover index is a measure of income inequality. The index quantifies the amount of income that would have to be redistributed throughout a population to achieve perfect income equality. The Hoover index represents income distribution on a scale ranging from zero to one, or perfect equality to maximum inequality, according to a paper by Garry Jacobs and Ivo Slaus. Computer spreadsheets simplify the process of measuring the Hoover Index by organizing your data and by providing formulas that automate certain calculations.
Locate income distribution data for the population for which you will calculate the Hoover Index. The U. S. Census Bureau collects such data.
Create a table in your computer spreadsheet to record your income distribution data. One column should represent the percentage of the population in question; the column adjacent to it should contain the amount of income that population segment earns. After representing all data in the spreadsheet, total the income from each segment to find the population's total income.
Plot two lines on a graph using the computer spreadsheet; the X axis represents the percentage of the population and the Y axis represents the percentage of the population's income it earns. One line -- the perfect equality line -- is drawn at a 45-degree angle from the origin of the X and Y axes to the income level of the top 100 percent of the total population. The other, the Lorenz Curve, is a graphical representation of each income-distribution entry; the Hoover Index is the maximum vertical distance between these two lines, according to Jacobs and Slaus.
Measure the widest distance between the perfect equality line and the Lorenz Curve, limiting your measurements to points on the Lorenz Curve that represent reported incomes. These values will yield the Hoover Index. Draw the line from the perfect equality line and the Lorenz Curve to the horizontal axis to approximate what percentage of the population controls the top half of a population's total income.
Compute the difference between these two values, then divide that difference by the value represented by the perfect equality line; the resulting ratio is the population's Hoover Index. If the perfect equality line reports $80,000 and the Lorenz Curve reports $75,000, the Hoover Index is (80,000 - 75,000) / 80,000 = 0.0625. That ratio indicates that just over 6 percent of the population's income should be distributed from the top half to the bottom half of the population to achieve perfect income equality.
Tips & Warnings
- The Hoover Index is also known as the Robin Hood Index and measures how much money would have to be taken from the top half of the population and given to the bottom half for each member of the society to have the same income.
- Computer spreadsheet
- Demographic data
- "Cadmus Journal"; Indicators of Economic Progress: The Power of Measurement and Human Welfare; Garry Jacobs and Ivo Šlaus, Oct. 3, 2010
- Maxi-Pedia; Robin Hood Index, 2011
- Maxi-Pedia; Lorenz Curve, 2011
About the Author
Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.
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