A decomposition of poverty headcount : income and population dynamics

Abstract

We formalise and present a detailed decomposition method to explain changes in poverty when the poverty line is not fixed and depends on the income distribution. Using the shift-share simulation approach, we decompose poverty change into four components, namely income growth, change in inequality, change in poverty line, and change in total population. We provide empirical illustrations with EU-SILC data for Malta between 2005 and 2018. We find that the poverty line and income growth have been the most important contributors to poverty changes, especially during periods of rapid income growth. This decomposition can be used either to interpret changes between two periods or to microsimulation models of taxes and benefits.