The Population Sub‐Group Income Effects on Inequality: Analytical Framework and an Empirical Illustration

Abstract

A method is developed to examine the population sub‐group income effects on inequality using the generalized Theil indices. The proposed method is illustrated by computing the effects of marginal changes in the occupation‐specific incomes on per capita income inequality in Australia based on data for 7197 sample households relating to the 1988‐89 Household Expenditure Survey conducted by the Australian Bureau of Statistics (ABS). The study shows that the growth of (distribution neutral) per capita income in four occupations, namely, unemployed and pensioners, trade‐persons, machine operators and laborers, is inequality reducing whereas the growth of per capita income in all other occupations is inequality augmenting. The occupation‐specific income effects on between‐group inequality are, however, stronger than those on within‐group inequality. These findings are invariant to the choice of alternative distributional weights used in the generalized Theil indices.