Re-Interpreting Sub-Group Inequality Decompositions

We propose a modification to the conventional approach of decomposing income inequality by population sub-groups. Specifically, we propose a measure that evaluates observed between-group inequality against a benchmark of maximum between-group inequality that can be attained when the number and relative sizes of groups under examination are fixed. We argue that such a modification can provide a complementary perspective on the question of whether a particular population breakdown is salient to an assessment of inequality in a country. As our measure normalizes between-group inequality by the number and relative sizes of groups, it is also less subject to problems of comparability across different settings. We show that for a large set of countries our assessment of the importance of group differences typically increases substantially on the basis of this approach. The ranking of countries (or different population groups) can also differ from that obtained using traditional decomposition methods. Finally, we observe an interesting pattern of higher levels of overall inequality in countries where our measure finds higher between-group contributions