Measuring the Dynamics of Inequality of Opportunity by Income Sources

Decomposing the inequality into several factor components makes it possible to understand where most of the observed inequality comes from. In this paper, we offer a methodological proposal for the identification of the drivers of inequality of opportunity through a non-parametric estimation strategy. Specifically, we propose to merge existing techniques for inequality decomposition by factor components (Shorrocks, 1982, 2012; Lerman & Yitzhaki, 1985) with non-parametric strategies for inequality of opportunity estimation in order to identify the contribution of different income sources (e.g. work income, capital income, transfers) to observed overall inequality of opportunity in societies. This analysis may be of particular interest for policy-makers because once the channels of transmission are identified, public policies can be better targeted toward mitigating – and eliminating – inequality of opportunity. Our proposal is validated through a simple application to SHIW (Survey on Household Income and Wealth), by which it emerges that inequality of opportunity amounts to 10% of overall inequalities in Italy, with a greater contribution (8%) originating from capital income and a compensation role of social transfers (-1%).