Decomposing structural decomposition: The role of changes in individual industry shares

Abstract

Decomposition studies typically present structural change effect – such as the impact of changes in industry output shares on energy demand – as a single, aggregate contribution. However, if the purpose is to identify the role of individual sectors, an alternative approach is required. The generalised Divisia index method (GDIM) proposed by Vaninsky (2014) allows to decompose the structural change effect by attributing its parts to changes in individual shares. At the same time, GDIM takes into account interdependence of individual shares, stemming from the unit-sum constraint. In this paper we propose an arguably simpler and intuitive formulation of such a decomposition, building on the Harrison, Horridge, and Pearson (2000) decomposition method. This formulation also provides a rationale for the interpretation of individual share effects. We demonstrate that unravelling the pattern of structural change in a formal way can lead to identifying a few expanding or contracting activities as key contributors to change in energy use. This point is supported by an illustrative application, in which we decompose changes in electricity and heat demand in the European Union in the years 2000–2014.