Sectoral Decomposition Analysis of Regional Income Inequality Essay (Critical Writing)

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Updated: Jan 4th, 2024

Several academic papers have discussed how to analyze income inequality and its determinants. Most of these literature used different data and various methods to look at the relationships between different impact factors and income inequality. Zhang Guang-sheng and Jiang Jing-qi (2007) examines the regional disparities and its determining factors in rural China by using the 2002 survey data based on one thousand agricultural household.

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The study employs Gini coefficient and the Theil index. The result of the study shows that although Gini coefficient and Theil index is at normal level, it needs to point out that there exist a risk that without taking adequate policy into account, the income inequality may rise with the misbalanced growth of regional economy.

Paas and Schlitte (2004) deal with the development of regional disparities in per capita GDP and convergence processes in the enlarged EU by conducting a study on income disparities and convergence processes at regional level in the EU-25. A total of eight hundred and sixty one regions are examined during the period 1995-2003. First, Theil’s index was applied in order to illustrate the progress within and between region disparities. Second, it conducted a formal ß-convergence analysis, taking into consideration the effects of spatial dependence and controlling for national effects.

The results of this study depicts that poor countries located in the European border showed faster growth than the comparatively rich countries located in the core of Europe. However, national factors are believed to be the main driving force behind the convergence process. During this process the assessment of new member countries has shown an increment in regional disparities. When one crosses a national border, geographical growth spillovers no longer have any importance. Thus, the small impediments on boarders are still playing a major role in the enhancement of boarder to boarder integration in the European countries which make up the EU.

A study dubbed decomposition of European Union’s socio- economic and global inequality was conducted by Novotny (2004) which tried to quantify the socio-economic inequalities in the globe, within the EU and within macro-regions. It tried to conduct this study with major focus on to the Regional Dimensions. The study prefers to use regional categories instead rather than the more predictable but varied group of individual states.

The relative inequalities rates are examined so as to allow some cross-regional comparison of inequalities. The study findings depicted that a system’s regional inequality tends to general increase within the kind of geographical scale in which it is located or in which it is observed. The study also found out that there is a very limited but negative association which exists between economic development levels and inequality within the European region and the wide world wide subsystem.

Babatunde (2008) examines income disparities among a sample of farm households in rural Nigeria. The result shows that the overall Gini coefficient of income inequality is 0.40 and that while farm income reduces income inequality, off-farm income raises income inequality.

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Off-farm activities such as non-agricultural earnings, agricultural earnings and self-employment earnings all raise inequality, while salary and other earnings such as capital income and pensions reduces income disparity. Since off-farm sector development is prone to raising inequality, it is recommended in the study that exclusion of barriers experienced by poor households when accessing better off-farm income generating opportunities is paramount, so that it would have an equalizing effect on income distribution.

Mishra Padmaja and Ashok Parikh (2005) present a decomposition analysis of household consumer expenditure in China between the period 1977-78 and 1983. The study explores inequality by regions (states) and sectors (urban-rural) during this period based on the survey data at national level with the use of a class of entropy measures that are generalized. The results of this study show a decline in inequality during this period due to economic growth and anti-poverty programmes. The study also reveals that the national inequality is greatly determined by within states inequality and within sector disparities explains a wider portion of country level inequality.

Menezes et al. (2008) have conducted a study in Brazil to explore regional income convergence. The study uses micro data considering population aspects with relationship to life cycle in shaping the relevance of the aspects in elucidating the evolution of regional income inequality. The data analyses which were arranged age cohorts portray varied dynamics in income disparity across generations that, with the convergence being visible only for the older generations. A low convergence speed is observed for the bigger share of income younger age groups within the country. Convergence is absent even for the older age groups, when retirement benefits, pension benefits and other forms of government transfers are excluded from income.

Using the nationwide household data, Chi, Wei, et al. (2007) explores the variations in income distribution of Chinese urban population in the period s 1987-96 and 1996-2004 and assesses the possible causes of these changes. The study uses the Oaxaca–Blinder decomposition technique to decompose the mean income increases, and the Firpo–Fortin–Lemieux method based on a re-centered influence function to decompose the variations in the income distribution and the inequality measures such as the variance and the 10-90 ratios.

The results show that factors such as the broadened gender pay disparity, the rising levels of return to tertiary education, the broadened gap in the production among industries, ownership and regions, -all summarized as income structure effects- have contributed to most of the overall increases in income inequality. During the time periods, 1987–96 and 1996–2004, there is a great variation at different points of distribution in the impacts of these factors.

Duro, Juan Antonio (2004) employs Theil’s population-weighted index to study interregional income disparities in Europe. The study applies two decomposition analyses as follows. First, regional countries are used in decomposing regional inequalities. Second, income and demographic changes are used when separating inter temporal inequality changes. The study reveals a reduction in cross regional inequality for the period 1982-1997 which is attributed to real convergence among countries. Within country regional inequality is also common calling for better policy framework. The study also attributes inequality changes in Europe during this period to income variations and not population changes.

Cai Fang, Wan Guaghua and Vehmaan-Kreula Janis (2004) studies the trend in regional inequality in rural China in the period 1985-2002 and decomposed the total inequality into within and between components dividing China into three regions(east, west and Central). Both monetary and non-monetary indicators are used in the study. The study relates regional disparities in China to variations in natural resources endowment portrayed across regions, location proximity factors, variations in the rate of economic development, the irregular economic change impact and inequality in provision of economic and public infrastructure.

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A similar study by Akita, Takahiro (2002) explores factors determining regional income inequality in Indonesia and China using the double-stage nested Theil decomposition technique similar to ANOVA. District-level income and population data in Indonesia and china were used to examine factors shaping regional differences. The study reveals wide income disparities between and within regions both in China and Indonesia which is attributed to natural resources endowment. It is also clear in this study that poor regions recorded high income inequalities than richer regions. Between provinces disparities are also much more prominent than between the regions hence need for policy framework.

With respect to all the analyzed studies in this section this study takes a similar methodology by exploring the regional inequalities in Yogyakarta special province using the weighted coefficient of variation and Theil T index. The study seeks to investigate whether the existing theories are applicable in this region and if not come up with a better theory for explaining the perceived inequalities.

Works Cited

Akita, Takahiro “Decomposing regional income inequality in China and Indonesia using two-stage nested Theil decomposition method”, ­Springler-Verlag: the annals of regional science. 2003, Vol. 37: pp 55-77.

Akita, Takahiro. “Sectoral Decomposition of Regional Income Inequality in Indonesia, A Comparison with Postwar Japan”, IUJ Research Institute Working Paper 2004-3.

Babatunde, R.O., “Income Inequality in Rural Nigeria: Evidence from Farming Households Survey Data”, Australian Journal of Basic and Applied Sciences. 2008, 2(1): 134-140.

Cai, Fang, Wan Gangue and Vehmaan-Kreula Janis, Inequality and Poverty in China. Finland: UNU-WIDER, 2004.

Chi, Wei, Li, Bo and Yu, Qiumei, “Decomposition of Changes in Earnings Inequality in China: A Distributional Approach”, Munich Personal Repec Archive. 2007, Paper No. 3806.

Duro, Juan Antonio, Regional Income Inequalities in Europe: An updated measurement and some decomposition results. Universitat Autònoma de Barcelona. Departament d Economia Aplicada, Working paper No. 11, 2004.

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Gottschalk, Peter and Smeeding, Timothy M, “Empirical evidence on income inequality in industrialized countries”, Handbook of Income distribution 2000, chapter 5.

Litchfield, J.A.,. “Inequality Methods and Tools”, Text from World Bank Site on Inequality, Poverty and Socio-economic Performance. 1999.

Menezes, Tatiane A. et al. “Demography and Evolution of Regional Inequality”, Brazil: University of Sao Paulo, 2008.

Mishira Padmaja and Ashok Parkh, Household expenditure inequalities in India: A decomposition analysis, a journal compilation, Vol. 38 issue 2, pp 225- 236. International Association for Research in Income and Wealth, John Wiley and Sons, inc.

Novotny, Josef. “Decomposition of Global and European Socio-economic Inequalities with Attention to Their Regional Dimensions”, Regional and Sectoral Economic Studies. 2004, Volume 4:2.

Paas, Tiiu and Schlitte, Friso, ‘Regional income Inequality and Convergence Processes in the EU-25’. 2004.

Zhang, Guang-sheng and Jiang Jing-qi, ”Regional Inequalities and Its Determinants in Rural China: An Empirical Study Based on Agricultural Household Level Data”, China-USA Business Review, 2004, Volume 6:1.

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