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Inequality Decomposition by Factor Component: A New Approach Illustrated on the Taiwanese Case

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  • Martin Fournier

    (CERDI - Universite d' Auverne and CREST)

Abstract

The issue of measuring the relative importance of income factors in the distribution of household income is at the heart of studies of changes in income inequality. Usual decompositions methods mostly based on Shorrocks (1982) framework allow for a broad evaluation of the contribution of income sources. These decomposition procedures however suffer from two strong drawbacks: i) the share of inequality imputed to any income source is independent of the inequality measure used and, ii) the impact of changes in the marginal distribution of income sources cannot be disentangled from the effect of changes in correlation between sources. This paper generalises the methodology briefly and intuitively initiated by Burtless (1999) and provides a general framework for inequality decomposition by factor components. This method, based on the concept of rank correlation, has two main advantages over usual decomposition procedures: i) it allows for a decomposition of observed changes in the whole income distribution and not just of a specific inequality index and, ii) it enables to isolate the specific impact of marginal distribution changes of income sources as well as that of changes in correlation between sources. This paper illustrates the application of the methodology on Taiwanese data over the 1979-94 period. After a long phase of economic development with decreasing inequality, Taiwan has experienced a widening of income disparities since the end of the 70s. Many studies emphasise the role played by changes in family structure and especially to a rise in assortative mating of spouses, but fail to measure the specific impact of rising correlation between spouses' income. Using the methodology developed in the first part of the paper, we find that changes in the earning structure of household members have been strongly unequalizing and that the main force comes from the rise in the correlation between spouses' earnings.

Suggested Citation

  • Martin Fournier, 2000. "Inequality Decomposition by Factor Component: A New Approach Illustrated on the Taiwanese Case," Econometric Society World Congress 2000 Contributed Papers 1288, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1288
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    References listed on IDEAS

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    1. Angus S. Deaton & Christina Paxson, 1994. "Saving, Growth, and Aging in Taiwan," NBER Chapters, in: Studies in the Economics of Aging, pages 331-362, National Bureau of Economic Research, Inc.
    2. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
    3. Frédéric Chantreuil & Alain Trannoy, 2011. "Inequality Decomposition Values," Annals of Economics and Statistics, GENES, issue 101-102, pages 13-36.
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    5. Burtless, Gary, 1999. "Effects of growing wage disparities and changing family composition on the U.S. income distribution," European Economic Review, Elsevier, vol. 43(4-6), pages 853-865, April.
    6. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-442, June.
    7. repec:adr:anecst:y:2011:i:101-102:p:02 is not listed on IDEAS
    8. Kanbur, Ravi & Lustig, Nora, 1999. "Why is Inequality Back on the Agenda?," Working Papers 127690, Cornell University, Department of Applied Economics and Management.
    9. repec:bla:econom:v:63:y:1996:i:250:p:s119-39 is not listed on IDEAS
    10. Graham Pyatt & Chau-nan Chen & John Fei, 1980. "The Distribution of Income by Factor Components," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 451-473.
    11. Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January.
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    Cited by:

    1. Masato Okamoto, 2011. "Source decomposition of changes in income inequality: the integral-based approach and its approximation by the chained Shapley-value approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(2), pages 145-181, June.

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