Decomposing income inequality into factor income components : evidence from selected G20 countries

Income inequality has been rising in a number of countries in recent years and has been a growing concern. The total income of high-income households has increased faster than that of low-income households in a number of countries. Similarly, the wage gap between the top 10 per cent and bottom 10 per cent of wage earners has also widened. This paper investigates the factors that have contributed to the level of inequality and its changes over time in 13 selected G20 countries in order to address this issue at the policy level. The results show that labour income is the most powerful factor contributing to inequality in all countries under analysis. Transfers and benefits are the most important factors contributing to reducing inequality, but these alone cannot address the issue of rising inequalities in countries where unemployment continues to be high, which requires intervention in the labour markets. Furthermore, the paper also analyses the factors that contributed to the rise in labour income inequality and the results show that employment status and education are important factors contributing to inequality in the majority of the countries, though age, sex and industry group are also contributing to inequality in some countries.