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This thesis first presents a general procedure for decomposing income inequality measures by income source. The first method draws on the literature of ethical social index numbers to construct a decomposition based on a weighted sum of the inequality indices for the respective component distributions. The second method is based on the Shap- ley value of transferable utility cooperative games. The ethical and technical properties of the decompositions are examined, showing that the interactive technique has some previously known decompositions as special cases. In the third chapter I examine the contribution of differences in educational attain- ment to earnings inequality using the interactive decomposition by factor sources, intro- duced in chapter two, of the Atkinson-Kolm-Sen inequality index. I first use an estimated sample-selection model to decompose predicted labour earnings of a random sample of Canadians into a base level and a part due to returns to education. I do this decomposi- tion once ignoring the effect education has on the probability of being employed and once accounting for this fact. I then calculate the contribution of these two sources of earnings to inequality measured by a S-Gini index of relative inequality for the full sample as well as two separate age cohorts. The results indicate that approximately one half to two thirds of measured inequality can be directly attributed to returns to education while the interaction between the two sources post-secondary. The fourth chapter uses the earnings model from the third chapter to conduct policy simulations for broadly based policies, low targeted policies, and high targeted policies. I demonstrate that the policies targeting low education individuals produce a larger increase in social welfare than do the other two types of policy.

This thesis first presents a general procedure for decomposing income inequality measures by income source. The first method draws on the literature of ethical social index numbers to construct a decomposition based on a weighted sum of the inequality indices for the respective component distributions. The second method is based on the Shap- ley value of transferable utility cooperative games. The ethical and technical properties of the decompositions are examined, showing that the interactive technique has some previously known decompositions as special cases. In the third chapter I examine the contribution of differences in educational attain- ment to earnings inequality using the interactive decomposition by factor sources, intro- duced in chapter two, of the Atkinson-Kolm-Sen inequality index. I first use an estimated sample-selection model to decompose predicted labour earnings of a random sample of Canadians into a base level and a part due to returns to education. I do this decomposi- tion once ignoring the effect education has on the probability of being employed and once accounting for this fact. I then calculate the contribution of these two sources of earnings to inequality measured by a S-Gini index of relative inequality for the full sample as well as two separate age cohorts. The results indicate that approximately one half to two thirds of measured inequality can be directly attributed to returns to education while the interaction between the two sources post-secondary. The fourth chapter uses the earnings model from the third chapter to conduct policy simulations for broadly based policies, low targeted policies, and high targeted policies. I demonstrate that the policies targeting low education individuals produce a larger increase in social welfare than do the other two types of policy. / Arts, Faculty of / Vancouver School of Economics / Graduate