Aggregate Productivity Loss And The Theil Index Of Inequality

This paper suggests that the difference in the Theil indices of inequality between two economies approximately measures the relative loss of aggregate productivity caused by distortions in labor allocation. Moreover, the Theil index itself can be interpreted approximately as the possible maximum loss of aggregate productivity caused by these distortions. The Theil index is a widely used measure of economic inequality. While the information-theoretic aspects of this index have been extensively analyzed (e.g., Cowell, 2003), there are very few analyses on its economic aspects. This paper analyzes an economic aspect of the Theil index and shows a connection between this index and productivity.