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Factor Components of Inequality: A Cross-Country Study


  • Note: This research was partly supported by the Institut d'Economie Publique in Marseille (IDEP) and the Marie Curie Fellowship program at the Universidad Carlos III. We are greatly indebted to Richard Breen for the discussions that gave rise to this paper. The paper has benefited from the comments of participants at the “7th Journées Louis-André Gérard-Varet,” “Growing Inequalities' Impacts” (Milan, February 2011), and “Equality in Crisis” (Rome, May 2012), as well as those by Tony Atkinson, Daniele Checchi, Juan Dolado, Marc Gurgand, Stephen Jenkins, two referees, and the editor, Conchita D'Ambrosio.


This paper uses data from the Luxembourg Income Study to examine some of the forces that have driven changes in household income inequality over the last three decades of the twentieth century. We decompose inequality for six countries (Canada, Germany, Norway, Sweden, the U.K., and the U.S.) into the three sources of market income (earnings, property income, and income from self-employment) and taxes and transfers. Our findings indicate that although changes in the distribution of earnings are an important force behind recent trends, they are not the only one. Greater earnings dispersion has in some cases been accompanied by a reduction in the share of earnings which dampened its impact on overall household income inequality. In some countries the contribution of self-employment income to inequality has been on the rise, while in others, increases in inequality in capital income account for a substantial fraction of the observed distributional changes.