On decomposing inequality and poverty changes over time: A multi-dimensional decomposition

The paper proposes a multi-dimensional decomposition of the changes in the Gini inequality index and the Sen-Shorrocks-Thon poverty index over time. The link among inequality change, re-ranking of individuals and income growth is explained by isolating the source and subgroup contributions to the determinants of the inequality change over time. We show that the poverty change over time depends on the re-ranking of individuals and the change in relative disparities among poverty gaps. These determinants of the change in poverty inequality are then decomposed by source and subgroup, yielding a three-way decomposition which combines time, source and subgroup ways of decomposing. An application to Italian household income data illustrates the proposed decomposition.