Decomposition of inter-regional inequality in average personal incomes by income sources: the Russia case study

Research background: This paper is dedicated to inter-regional disparities in personal incomes and their composing by sources. We suggest that income sources contribute differently to overall inequality. Some of them, e.g. property incomes, amplify inequality, while others, e.g. social transfers, should mitigate it. Purpose of the article: The aim of this article is to determine the character, direction and strength of influence of different sources, i.e. wages and salaries, property incomes, social transfers, entrepreneurship incomes and revenues from informal activities on inter-regional differences in overall incomes per capita and their dynamics based on Russian regional statistics in 2001-2014. Methodology/methods: We used the method of relative deflating of regional incomes based on the fixed consumer basket cost, the population-weighted Theil index to measure inequality and technique of its decomposition to evaluate the contribution of various sources to regions’ convergence in real incomes per capita. Findings: For Russian regions in 2001-2014 we revealed different paths of inter-regional inequality for various sources of incomes. Decomposition of inter-regional income inequality demonstrated the largest and growing contribution made to it by wages and salaries. Informal incomes demonstrated declining influence on inequality and provided more than half of total inter-regional convergence. The contribution of entrepreneurship incomes to inter-regional disparities occurred the third and slightly decreasing, but their share in total incomes has declined. Social transfers per capita demonstrated the largest smoothing effect, but their contribution to convergence is mostly depleted. The property incomes proved to have the greatest enhancing impact on inequality especially in the period of economic growth, albeit not large by value because of small share in total income. Ultimately we revealed the substituting role of informal incomes in respect of formal incomes and existence of self-perpetuating mechanisms of reducing inequality in Russian economy.