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A decomposition of UK income inequality — Anisa Butt (Economics PhD seminar)
We investigate the extent to which inequality in the total population is a consequence of income differences between population subgroups stratified by characteristics such as ethnicity and gender. Following Shorrocks (1984) method, generalised entropy measures are decomposed firstly by ethnic group and then gender into two components, inequality between and within subgroup populations. Using individual level data for the UK, we demonstrate within-group income inequality rather than between-group income inequality is the main contributor to overall income inequality. The between-group inequality component for subgroup population decomposition by both ethnicity and gender accounts only for a very small part of the overall inequality.
However, the question remains, to what extent can different factors explain inequality within these groups in the UK? Fields (2003) framework is followed, we measure the relative contributions of a set of factors to inequality in individual disposable incomes using data collected by the UK household longitudinal study (UKHLS). The explanatory variables introduced in an income generating mode are used to generate factor inequality weights. The results suggest the most relevant factors in explaining the observed inequality are Employment status, Education and Age.