Decomposing Household Income by Source and Subgroup - Alex Eble

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Income Source Contribution to Inequality (CV) 50 45 40 35 30 25 20 15 10 5 0 Decomposing Household Income by Source and Subgroup Intra-village inequality Within-county, inter-village inequality Regional Contribution Inter-county inequality Sidelines Handicrafts Remittances Family Business Agriculture Figure 11 – Absolute Regional Contributions to Income Inequality Decomposed by Income Component Given by the CV Income Source Contribution to Inequality (Theil's T) 6 5 4 3 2 1 0 Intra-village inequality Within-county, inter-village inequality Regional Contribution Inter-county inequality Sidelines Handicrafts Remittances Family Business Agriculture Figure 12 – Absolute Regional Contributions to Income Inequality Decomposed by Income Component Given by Theil’s T VII. Conclusions This paper offers a foundation from which to choose possible measures of income inequality. From this basis, it goes on to explain the capabilities of those measures which are seen most attractive under the lens of Shorrocks and Bourguignon’s rules 15
Decomposing Household Income by Source and Subgroup for a measure of inequality. Two of these measures, Theil’s T index and the half the square of the coefficient of variation, herein referred to as the CV, are then applied to the responses to the 2002 Rural Household Survey. Inequality across geographical regions is measured through decomposition of the two indices. The same process is applied to identify and analyze contributions to inequality from five mutually exclusive income sources. Overall, inequality stemming from income differences within villages contributes much, much more to overall inequality than inequality from differences in income between villages within a county and between counties. Of this inequality, much was accounted for by the income inequality in earnings from family business. Differences between counties, however, still contribute almost 35 percent to overall inequality according to Theil’s T Index. This is seen as exposing inequality in resource allocation, likely both political and natural. According to Theil’s T for inequality between counties, income inequality from remittances and handicrafts contributes 70 percent of all inequality. The prominence of these two factors suggests differences in natural resource distribution and proximity to infrastructure as a likely cause of between county income inequality. Pro-poverty migration policies, targeted investment programs, and expansion of infrastructure are all possible means to alleviate this inequality. Income inequality rising from family business, sidelines and handicrafts was responsible for all but 15 percent of inequality between villages within counties. This again points to differences in natural resources as a potential point of departure from income equality (some areas lend themselves more easily to fish farming or souvenir sales than others, for example) and also points to the aforementioned means to alleviate inequality stemming from this source. Income inequality within counties but between villages, however, contributed only a very small portion of overall income inequality and should form a policy focus point. The obvious culprit as the main income factor contributor to overall inequality was family business. Income inequality stemming from family business revenues accounts for nearly 80 percent of overall inequality according to the CV and nearly 40 percent according to Theil’s T index. The policy conclusion to be drawn from this mirrors that of Papatheodorou (1998): “The reduction of the inequality of entrepreneurial income appears to be the most effective way to reduce total inequality in Greece. It is, therefore, of great importance to redesign the current tax system in Greece in order to eliminate the tax evasion among the recipients of entrepreneurial income. This policy could prove the most efficient, if not only way, to significantly reduce income inequality.” Similarly, in the areas investigated in this paper family business is a significant contributor to every regional slice of inequality and also contributes the lion’s share to 16
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Decomposing Household Income by Source and Subgroup - Alex Eble

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