Decomposing Household Income by Source and Subgroup - Alex Eble

Decomposing Household Income by Source and Subgroup
overall inequality. Through instituting new tax policy and/or revitalizing existing
policy to curb the gross inequality stemming from this source of income, China could
make enormous strides in reducing income inequality. Conversely, without attention
paid to reducing income inequality stemming from family business, government
policy aimed at reducing income inequality could at best finish only a little more than
half of the job.
Looking at the other end of the spectrum, agriculture contributes almost nothing to
overall inequality (never more than five percent in any index). This finding has
equally strong policy implications. Policies geared at increasing income have
potentially inequality-inducing effects. Whereas a government-sponsored business
incubator would likely increase inequality in light of the results of this paper,
government investment in raising income from agriculture would almost certainly
reduce inequality.
Also interesting, remittances are the main contributor to inequality between counties.
Further investigation into literature on migration could reveal what factors contribute
to an individual’s decision to leave a village and remit money. Existing networks of
villagers, limited information, prosperity, and proximity to travel infrastructure are all
possible inputs. Policy towards alleviating inequality could improve access these for
the poor and thus affect the amount of resources flowing into a region from
remittances to accordingly even distribution across counties.
The main surprise that came from this investigation is a methodological one. The
relative contributions of income components and regional income inequality as
measured by the ineqdeco function in Stata® may violate Shorrocks’ assertion that the
relative contribution to income inequality of various components is independent of the
choice of inequality index. Certainly, the question remains: is family business
responsible for 80 percent of all income inequality or 40 percent? As can be seen
numerically in figure one and graphically in several of the preceding graphs, there are
numerous other instances in which the relative contribution of an income component
or regional contribution is different according to the CV than that given by Theil’s T.
In most cases the general structure of inequality contributions remains the same.
Family business and intra-village inequality, for example, contribute the lion’s share
to overall inequality for both indices. The proportional contributions of the several
income components, however, differ frequently and noticeably between the two
indices, as does regional decomposition. This result suggests one of four possibilities.
The most obvious possibility is that I committed a mathematical error in calculations.
It is also quite possible that I am misinterpreting Shorrocks’ use of the phrase “relative
contribution.” The other two less likely although more interesting possibilities are that
either Shorrocks made an error in his assertion or that Jenkins did so in writing his
algorithm.
For further investigation, time series data would help distinguish non-farmers from
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