A Novel Subgroup Decomposition of Income Inequality: Resolving the Information Mixture Problem

<title>Abstract</title> <p> The decomposition of income inequality is essential for identifying the structural determinants of economic disparity. However, conventional decomposition frame-works rely on inequality indices that measure internal dispersion without accounting for the foundational baseline of equality, thus suffering from the “information mixture problem”. To resolve these issues, we propose a novel subgroup decomposition methodology based on the Unequally Distributed (UD) and Relative UD (RUD) income framework. By extracting the foundational egalitarian baseline from income prior to decomposition and comparing the remaining RUD income to the corresponding state of perfect equality, this approach measures the departure from equality and partitions the variance within a RUD income distribution into pure within-group and between-group inequality, providing a mathematically consistent evaluation of structural disparities. <bold>JEL Classification:</bold> D31, D63, C43 </p>