Short‐run changes in rural income inequality: A decomposition analysis

Abstract

This paper quantitatively assesses the principal determinants of the rather dramatic decline in income inequality observed in rural India between 1968–69 and 1970–71. A simple form of decomposition analysis is used to demonstrate that the most important effects of changes in weather, in technology, and in other factors on income distribution are those which occur rather indirectly as a result of overall tightening of the labour market. Whereas in periods of generally bad weather, workers from high‐income households apparently ‘crowd‐out’ those from low‐income households, in periods of good weather income effects induce the former to consume leisure, thereby opening up more jobs for workers from low‐income households.