A New Generalized Variance Approach for Measuring Multidimensional Inequality and Poverty

Abstract

AbstractThe paper suggests a new generalized variance concept for measuring multidimensional inequality of a stratified society, based on multivariate statistical methods, where the members of society form a cloud in the oblique space of dimensions of inequality, such as income, expenditure and property. The cloud presents the multidimensional inequality capsulized in the cloud. The goal is to condense all the inequality information embodied by the cloud into a composite compact metric characterizing both the shape and the inner structure of the cloud. Contrary to the conventional literature that considers multidimensionality as a unidimensional weighted combination of the dimensions, our new composite index measures the inequality of the configuration of the points in the cloud. Our aim is twofold. First, we introduce the Inequality Covariance Matrix (ICM) assigned to the cloud, with elements measuring the correlations among dimensions. Having ICM, we propose the Generalized Variance (GV) of ICM to measure the composite Generalized Variance Inequality (GVI) level. Second, to evaluate the stratum-specific structure of the overall inequality, we suggest a new two-stage procedure. In the first stage, we divide the total GVI into between-groups and within-groups effects. Then, in the second stage the contributions of the strata to the within-groups inequality and, the contributions of the dimensions to the between-groups inequality are calculated. This GVI approach is sensitive to the correlation system, decomposable into stratum effects and, the number of dimensions is not limited. Moreover, including the log-dimensions in the analysis, GVI yields an Entropy Covariance Matrix giving a new Generalized Variance Entropy index. Finally, the GVI of censored poverty indicators means multidimensional poverty measurement. This special complex task is not yet solved in the traditional literature so far.