Decomposing Household Income by Source and Subgroup - Alex Eble

Decomposing Household Income by Source and Subgroup
I. Introduction:
Gross inequality is widely considered an undesirable social condition to be mitigated
by policy, as evidenced by diverse social programs instituted by government to
encourage more equitable distribution of resources. This social conviction, in turn,
encourages policy makers and social scientists to better understand the current
condition and sources of inequality. Massive ascent from poverty and rapid uneven
development experienced in countries such as China and India only amplify this need.
With the cooperation and guidance of Ethan Michelson I have been working to draw
on economics to make a contribution to sociological research on income inequality.
Sociologists focusing on China have given extreme amounts of attention to inequality
at individual and regional (and even international) levels while overlooking
investigation into sources of income. This paper looks into various methods, designed
by economists, of describing inequality in terms of its contributing factors. It then
applies these methods to a data set of rural household survey responses from China.
The inequality indices used can “decompose,” meaning that the overall measure can
be further explained or broken down into the sum of individual contributions to
inequality. In one method of break-down, the paper looks at the contribution to
inequality from each of five sources of income. In another method, the paper shows
what proportion of inequality comes from income differences within villages, within
counties but between villages, and between counties. The first method can identify
income sources which are equalizing or, conversely, disproportionate contributors to
overall inequality. The second measure can help identify where to further investigate
geographical inequality.
The second section of this paper briefly explains the relevant research on inequality
indices and how it can be used to choose a few indices from a broad field of
possibilities. The third and fourth sections explain two of these indices’ strengths and
weaknesses. The fifth gives a brief explanation of how these indices are applied to the
data. The sixth section displays the results and the last section interprets issues raised
by the data while suggesting further investigation.
II. Narrowing the Field of Income Inequality Indices
There are numerous mathematical measures to describe inequality and several
methods with which to choose these measures. Among the most successful attempts at
the latter are those performed by Francois Bourguignon and Anthony Shorrocks. In
specifying the conditions for selection of an inequality index for income distribution,
Bourguignon and Shorrocks agree upon a set of simple characteristics which define a
sound inequality index. Namely, they suggest that the index, a function of the set of
incomes:
a) Be continuous and differentiable over all individuals’ incomes
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