Decomposing Changes in Inequality Over Time
Microsimulation models are often used to consider counterfactual situations and answering ‘what if’ questions. However, these methods typically decompose all changes that occur at a given time, but do not separately isolate the impact of individual components. Simulation-based methods have been developed that can be used to simulate counterfactual incomes if one or more component is changed. This chapter moves beyond Oaxaca–Blinder work, which decomposes differences in individual wages, to decompose the full household-income distribution and its components. Counterfactual income-generating processes (wages, employment, etc.) are simulated to assess the impact of alternative situations, such as the degree of inequality, using income-generating processes from another time period (or country). This chapter utilizes, as a case study, Ireland, a developed country that experienced one of the highest sustained growth periods in recent decades. The chapter describes the estimation of simulation using an income-generation model, and then describes the Shapley-value decomposition. We use the microsimulation framework to understand changes in inequality, as the distribution of purchasing power associated with disposable income changed non-uniformly in terms of demography, labour market, market income, and public policy using an Oaxaca–Blinder–Bourguignon decomposition.