Investigating the Contribution Of Between Group Inequality in Overall Inequality Using Maximum Between-Group Inequality Approach: Urban and Rural Areas of Iran

Reviewing the literature of inequality decomposition by subgroups shows that between-group inequality (urban and rural areas) often accounts for a small share of total inequality. Therefore, in interpreting the result, researchers give less emphasis on designing appropriate policies for removing inequality across those areas. In this paper, we employed maximum between-group inequality approach for getting a better understanding of the importance and the role of between urban and rural areas inequality in overall inequality in Iran. The analyses have been done using annual data for 2004, 2008, 2012, and 2016 drawn from the Iranian Urban and Rural Household Income and Expenditure Survey. As expected, the results of conventional decomposition method (Theil index) show that inequality between urban and rural areas have a contribution of only 11.25 percent to the overall inequality. However, the results of maximum between-group inequality method show that the between-group inequality plays a more important role in overall inequality. In particular, the results of this technique show that the contribution of between-group inequality to the overall inequality is almost twice that obtained from conventional decomposition method. The important policy implication of the results is that economic policies aiming at reducing inequality should be much more concerned about this component of overall inequality in Iran. Furthermore, the findings of this paper reveal that overall inequality has been reduced after the implementation of Targeted Subsidies Reform in Iran.