INCOME INEQUALITY TRENDS IN SINGAPORE : A DECOMPOSITION ANALYSIS

Abstract

Against the background of Singapore's rapid economic advance, the issue of trends in income inequality is of considerable research interest. Previous investigations, however, have all been based on the Gini ratio as a measure of income inequality. This thesis makes use of the Theil index to examine the changes in income inequality in Singapore between the years 1974 to 1994, and attempts to isolate the major factors involved. To this end, a decomposition analysis was conducted with respect to gender, age, education, occupation and industry. Data from the annual reports on the Labour Force Survey was made used of, as well as newly available data with respect to income by age in the Profile of the Labour Force of Singapore 1983-1994. Income inequality in Singapore, as measured by the Theil index, fell between 0.16 and 0.20 for the years from 1974 to 1994. The broad pattern that emerges is as follows: income inequality was relatively low during the mid to late 1980s; it edged up in the 1980s with the onset of the restructuring of the economy, peaking in 1983; thereafter, the level of income inequality stabilised at relatively high levels. Decomposition of the Theil indices for the period between 1974 and 1994 showed that age, educational attainment and occupational differentials contribute significantly to income inequality. Inter-age inequality showed a downward trend over the period 1983-1994. Inter-educational inequality rose between 1974 and 1983 and declined thereafter. It accounted for about one-third of overall inequality on the average. Inter-occupational inequality, the highest among the three categories, rose steadily between 1974 and 1994. Furthermore, its contribution to the overall Theil index rose from less then 30 per cent in the 1970s to over 50 per cent in the 1990s. The continuous increase in inter-occupation inequality throughout the period examined was due to the two pronged effect of the immigration policy: the relative stagnation of wages for unskilled workers and the raising of wages for skilled and professional workers.