The paper examines Puerto Rican trends in income distribution during the 1970s and 1980s, then attempts to ascertain the source of the changes in income inequality through a decomposition of the Gini coefficient by factor income source. The study finds that poverty and inequality declined unambiguously during the twenty‐year period. The source of the fall in income concentration was found to have been tied, not to changes in the distribution or share of earned income, but to that of unearned income, particularly transfers. These appear to have also accounted for the decline in povert