Decomposing inequality change from the perspective of reranking and income growth between income groups

This paper proposes a decomposition of the change in inequality from the perspective of income groups. For every dichotomisation of the income distribution into poorer and richer parts, the decomposition allows to detect the change in the relative income gap between the two parts and the reranking between poorer and richer individuals. This decomposition approach is particularly suitable when analysts split the population between the individuals initially below the poverty line and those above the poverty line, since the decomposition allows to capture the effects of reranking and disproportional growth in income between poor and non-poor individuals and to compare these effects with those detected for the entire population. An application to Italian income data illustrates the proposed decomposition.