The Impact of Income Components on the Distribution of Family Incomes

Recent studies attempt to quantify the extent to which income inequality is due to income components, such as earnings, investment income and transfer income. This paper examines the fundamental issues and problems involved in assigning inequality contributions to components. Different decompositions are applied to U.S. family income data. A wide range of contributions can be obtained, even when naturally derived decomposition rules are used. Some absurd results obtained serve to warn against indiscriminate use of decomposition formula.