THE DETERMINANTS OF INCOME INEQUALITY : AN EXPLORATORY STUDY OF SINGAPORE

Abstract

The objective of this thesis is to clarify the determinants of income inequality among persons and families based on the human capital theory. Due to limitations of official data sources, we designed and conducted our own survey of the families of students of the honours class, to gather detailed data on the income and characteristics of families. From the limited sample, it is found that in general, an extra year of education leads to an increase of 13-15% in income and an extra year of work experience leads to an increase of 1.6-1.8% in income. However, the Gini coefficient of 0.23 measuring income inequality in human capital based estimated earnings is less than the Gini coefficient of 0.35 measuring income inequality in observed incomes, among earners. This shows that the influence of factors such as ability, opportunity, family background, random events and risk-taking is not insignificant; yet, human capital accounts for two-thirds of observed inequality. When the human capital based estimated personal earnings are combined into family income estimates, the resultant family earnings inequality with the Gini coefficient 0.30 is less than the observed family earnings inequality of 0.36. The difference between estimated and observed family income inequality is less than that between estimated and observed personal earnings inequality. It can thus be surmised that earners well endowed with human capital cluster in the same families. Moreover, the level of educational attainment is con-elated positively with the labour force participation rate, thus increasing family earnings inequality. Concentration of human capital may increase due to the effect of family background on human capital investments. It is found that the families of students from honours class compared to families in Singapore in general, tend to belong to relatively higher income classes and live in relatively more expensive dwelling units. When differences in labour supply between families are removed by alteration of the income concept, it is found that family income inequality measured by the Gini coefficient falls to 0.30 as compared to the Gini coefficient of 0.37 before removing the impact of differences in labour supply. Therefore, labour supply is also an important determinant of family income inequality. Equality of educational opportunity will go a long way in reducing interpersonal and inter-family income differentials.