Decomposition analysis of income inequality in Poland by subpopulations and factor components

Decomposition analysis of income inequality in Poland by subpopulations and factor components

 

Alina Jędrzejczak

 

Keywords: Income distribution, Income inequality, Decomposition

 

Summary: The Gini index of concentration is considered to be the best synthetic measure of income inequality. The desirable feature of an inequality measure is its decomposability by income sources and by subpopulations. It is known that the indices based on entropy can be decomposed simply into within-group and between-group components, while the Gini concentration index is decomposable only into the sum of the inequality within groups and the inequality between groups, plus a crossover term that takes into account the overlapping across subpopulations. The presence of the third component resulted in interpretational difficulties and induced some scholars to reject the Gini coefficient as a decomposable inequality measure. On the other hand, the crossover term can be treated as an advantage of the Gini index and can be used to complete the inequality analysis by subgroups. In the paper the selected decomposition methods were discussed and then applied to the analysis of income distribution in Poland. The aim of the analysis was to verify to what extent the inequality in different subgroups (and different income sources) contributes to the overall income inequality in Poland. To provide the decomposition of the Gini index by subgroups the population of households was partitioned into several socio-economic groups on the basis of the exclusive or primary source of maintenance. Moreover, the households were divided by economic regions using the Eurostat classification units NUTS1. To complete the analysis the Gini index decomposition by factor components was conducted. This helped to find out which sources of household income have a significant influence on income inequality in Poland.

 

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