Income inequality: Gini coefficient in Latin America

We construct individual income by adding all income sources together. Whenever possible we distinguish among income from salaried work, self-employment and salaries assigned to owners. Whenever possible we compute labor income from the main activity. Individual non-labor income is divided into three categories: (i) pensions; (ii) capital and benefits; and (iii) transfers. Countries ask different questions to capture data on capital income, interests, profits, rents and dividends. For comparison purposes, we prefer to gather all these questions into a single category. The same criterion applies to transfers, although we also construct a variable that identifies those transfers made by the government, and another that captures transfers clearly associated to poverty-alleviation programs. Since we are interested in capturing current income, non-current items are not included in our definition of income. The same criterion leads to the exclusion of income from the sale of some goods and assets like vehicles, houses, or stocks. We also exclude income from gifts, life insurance, gambling and inheritances.

Once we have individual income, we construct household income by adding income for all members from the household. Household per capita income is computed as the ratio between total household income and the number of members in the household. Finally, we compute adjusted household income by several equivalence scales.

Is the implicit rent from own-housing included in the calculation of income?

Yes, it is included. The concept of income considered in SEDLAC refers to the flow of resources obtained as remuneration towards the use of all the assets owned by an individual or household. According to this definition, income should include not only returns for the use of labor and capital, but also any other rents produced by the possession of durable goods, such as houses or cars.

Families that live in their own dwellings implicitly receive a flow of income equivalent to the market value of the service that the use of this property represents for them. This remuneration should be computed as part of household income, even though it is never recorded in a formal market.

In some surveys, owners are asked to estimate the rent they would have to pay if they had to rent the houses they occupy. The answer to this question is used to impute rents to own-housing, although issues of reliability in the answers are usually raised, in particular in areas where housing markets are not well developed.

In those surveys where this information is not available or is clearly unreliable, we increase household income of housing owners by 10%, a value that is consistent with estimates of implicit rents in the region.