Treatment effects on within-group and between-group inequality. A causal decomposition approach

The recent surge in inequality has been linked to growing disparities both within and between economic strata. Existing approaches to analyzing changes in inequality, however, often ignore within-group inequality by solely analyzing mean differences between groups. Approaches that do allow examining both changes in within- and between-group inequality in turn are limited in addressing causal questions about why inequality is changing. This paper introduces a novel approach to analyzing how a treatment variable affects both changes in within- and between-group inequality and decomposing these changes into compositional and behavioral effects. The procedure combines a classic variance decomposition with the Kitagawa-Blinder-Oaxaca (KBO) decomposition approach. Compared to KBO, however, the method allows analyzing treatment effects not only on the mean but on the whole conditional distribution. I demonstrate the utility of the approach with an application analyzing the changing impact of motherhood on women’s earnings and its consequences for earnings inequality.