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Decomposing income inequality by source: a dual-method and dual-index analysis
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DOI：10.1007/s10888-026-09739-3.png)
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Abstract
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This paper examines how different income sources contribute to total income inequality using natural and marginal decomposition methods applied to two key indices: the relative Gini index (RGI) and half the squared coefficient of variation (HSCV). Using harmonised microdata from 27 EU countries through the EUROMOD model, the study clarifies that the divergence between natural and marginal decompositions arises from their distinct normative foundations: natural decompositions of covariance-based measures, such as the RGI and HSCV, correspond to the absolute inequality view, while marginal decompositions express the relative view. Expanding the analysis to the generalised entropy (GE) family shows that only the natural decomposition of the HSCV aligns with the absolute inequality view, while natural decompositions for other GE indices do not fit neatly into either perspective. In contrast, marginal decompositions always align with the relative inequality view. Empirically, the RGI and HSCV produce notably different source contributions, especially for capital income and transfers. The results highlight the importance of using multiple inequality indices in parallel to obtain a balanced and normatively consistent interpretation of distributive patterns.
Keywords:
Income inequality
Decomposition methods
Income sources
Absolute inequality
Relative inequality
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