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DECOMPOSING THEIL'S INCOME OF INCOME INEQUALITY INTO BETWEEN AND WITHIN COMPONENTS: A NOTE
Author(s) -
Adelman Irma,
Levy Am
Publication year - 1984
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/j.1475-4991.1984.tb00479.x
Subject(s) - inequality , citation , economics , economic inequality , econometrics , library science , mathematics , computer science , mathematical analysis
In his study of the Brazilian size distribution of income, Fishlow [I9721 modified Theil's index of income inequality by decomposing the general measure to quantify the socioeconomic effects leading to inequality among workers. In particular, he considered two ways of decomposing total inequality. One is into between and within components; the other is into the contribution to total inequality of variations in mean incomes among sectors, regions, etc., taking account of interaction effects. Our comment concerns the first method. In this note, we show that decomposing Theil's index of total inequality into between and within components cannot lead to an unambiguous quantification of the causes of inequality because, in the presence of intercorrelation between the principles of decomposition, the decomposition overstates the contribution of the first cause considered and understates the contribution of subsequent effects. The first step in computing inequality between groups is analogous to estimating a misspecified regression equation where all but one of the explanatory variables are omitted. As is well known, if the true relationship is