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The Sources of Income Inequality in Indonesia: A Regression-Based Inequality Decomposition

Publication | February 2017
The Sources of Income Inequality in Indonesia:  A Regression-Based Inequality Decomposition

Access to education and finance are key to reducing income inequality.

Growing inequality is an important problem for developing countries, and Indonesia is no exception. Narrowing the gap between those at the top and at bottom of the income distribution has become one of governments’ main concerns. To achieve this goal, the sources of income inequality must be identified appropriately. We investigate the sources of income inequality in Indonesia using household-level data (Indonesia Family Life Survey). The approach employed is regression-based inequality decomposition using the Shapley value decomposition framework. The results show that education, wealth, and the employment sector are significant contributors to income inequality in Indonesia. These findings suggest that any policy aimed at reducing unequal access to education and finance is important to improve income inequality in the future.

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