The Distribution of Income by Factor Components

Abstract

This paper furthers the discussion of income inequality decomposition by focusing attention on the problems which arise in this context when available data are restricted to the distribution of factor incomes between groups of families defined by their total income level. First, it sets out the Rao (1969) decomposition of the Gini coefficient for total income in terms of factor shares and factor concentration ratios. Further decomposition of concentration ratios into rank correlation ratios and factor Ginis is recommended when individual data are available. Second, interpretation of concentration ratios as Gini coefficients is shown to be misleading. An analogue in economic theory is required. The results obtained required exploration of the alternative concepts and measurements which are possible when individual family data are available. In turn, these had to be related to the more limited set of concepts which can be calibrated when available data are taken from a secondary source. Caution is advised in interpreting results based on secondary sources of income inequality by factor components.