Factor components of inequality: Cross-country differences and time changes

Abstract

Recent work on inequality has examined either changes in the distribution of income or in that of earnings, without examining how the latter affects the former. In this paper we perform a factor decomposition of income inequality in order to assess the importance of earnings and income from other sources in recent changes in inequality. We examine data for 8 industrial countries over the last three decades of the 20th century. Our findings indicate that although changes in the distribution of earnings are an important aspect of recent increases in inequality, they are not the only one. In some countries the contribution of self-employment income to inequality has been on the rise. In others, increases in inequality in capital income - probably caused by tax changes - account for a substantial fraction of changes in the distribution of income