This study applies the Rao decomposition method to the Iranian households income data for both urban and rural areas.
Examining the role of different income components in the aggregated income, helps to evaluate the effects of economic growth on income distribution. It also leads to have a better selection of the redistribution policies.
The results show that the most important factor in income inequality stems from self-employment income. On reason for that is the tax avoidance in this sector. Wages and salaries in the public sector is another import factor of income inequality. This is because of a monopolistic condition in public employment. The elasticity of the Gini coefficient with respect to self employment is greater than other components. So, any growth strategy intending to increase self-employment or expanding the public employment level should be accompanied by redistribution policy to improve the inequality or at least prevent it from getting worse.
JEL classification: D31