Vesa-Matti Heikkuri

This paper revisits the longstanding question of how to decompose inequality indices into contributions of factor components, such as labor income, capital income, and taxes and transfers. We start from the axiomatic framework of Shorrocks (1982) and discuss why one of his core axioms, two factor symmetry, imposes an undesirable restriction. We propose an alternative axiom, conditional transfer neutrality, to replace two factor symmetry, and we show that our axiomatic framework uniquely determines the source decomposition for any inequality index. This decomposition coincides with the natural decomposition for many inequality indices, including the Gini coefficient, the coefficient of variation, and top income shares. For other inequality indices, such as the Theil index and the mean log deviation, our axiomatic framework implies novel source decompositions that we argue behave better than the traditional formulas. Furthermore, we show how the source decomposition of the Gini coefficient can be interpreted geometrically.

This paper examines the impact of demographic change on household income inequality in the United States, both historically and prospectively. We emphasize the distinct roles of population aging and cohort replacement and develop a methodology to study their joint compositional effect. We document that cohorts born later in the 20th century embody higher levels of income inequality compared to earlier-born cohorts, and we argue that most of the increase in inequality over the past two decades can be accounted for by demographic change. Moreover, we predict that future demographic change will continue to put significant upward pressure on household income inequality in the United States.