Decompositions of Inequality and Poverty by Income Source

There is ample empirical literature on the contributions of different income sources to total income inequality. In contrast, studies estimating the contributions of income sources to income poverty are scarce. This paper presents a new decomposition of the Foster-Greer-Thorbecke poverty index, based on a marginal approach previously employed to decompose income inequality. We apply these marginal decompositions to data for 15 EU countries and classify six income sources according to their impact on inequality and poverty. Our results indicate that there are significant differences in the contributions of income sources to poverty compared to their respective contributions to inequality.