The measurement of income inequality has been a focus of considerable study. However, the determinants of income inequality are still unclear. This study explores which income sources are primarily responsible for the observed U.S. income inequality using a decomposition method. Moreover, by estimating the marginal effect of a specific source income, I analyze its impact on overall income inequality. By doing so, this study identifies which source income has been alleviating overall inequality the most – or has been increasing it the most – before and after the financial crisis.
Among eight different sources, wage income has the largest as share in total income, yet it is most equally distributed income source. However, the increase in the Gini of wage income after the financial crisis suggests that the intensifying unequal distribution of this source income contributed to rising inequality.
The role of government transfers is important in reducing inequality, especially after the financial crisis. The equalizing effects of a ten percent increase in these transfers is a 0.84 percent reduction in the Gini of total income after the financial crisis. Among different government transfers, Social Security is the greatest equalizer. Besides the government transfers, retirement income reduces total inequality.
Interest and self-employment income show unequalizing effects on total inequality. The importance of interest income rose during the financial crisis and increased again more recently. The shares of self-employment income decreased since the financial crisis, and thus its contribution to overall inequality became smaller.