Palma Ratio

The Palma Ratio is an income inequality indicator proposed by Chilean economist José Gabriel Palma. It is calculated by dividing the share of national income held by the richest 10% of households by the share held by the poorest 40%. A Palma ratio of 1.0 means the top decile and the bottom four deciles receive equal shares of national income; higher values indicate greater inequality.

Palma's underlying empirical observation, developed in work circulated from around 2006 and published more formally in later papers, was that the income share of the "middle" deciles 5–9 tends to be remarkably stable across countries at roughly half of national income. Most of the cross-country variation in inequality therefore comes from how the remaining half is split between the top 10% and the bottom 40%. Focusing directly on that ratio, Palma argued, captures distributional politics more transparently than the Gini coefficient, which compresses the entire Lorenz curve into a single number and is relatively insensitive to changes at the tails.

The measure has been picked up by development economists and international organisations. Researchers at the UNDP, the Center for Global Development, and Oxfam have used it in analyses of inequality and the Sustainable Development Goals. During negotiations over the post-2015 development agenda, advocacy groups pressed for a Palma-based inequality target; SDG indicator 10.1.1 ultimately tracks growth of the bottom 40% rather than a Palma ratio directly, but the measure remains widely cited.

Typical values range from around 0.9–1.3 in highly egalitarian countries (e.g. several Nordic states) to above 5 in highly unequal economies in Southern Africa and parts of Latin America. Limitations include sensitivity to the underlying household survey, the exclusion of wealth, and the fact that top incomes are often under-reported in survey data compared with tax records.