FEM 4204
HUMAN CAPITAL ISSUES: INCOME
DISTRIBUTION
ZURONI MD JUSOH
RESOURCE MGT AND CONSUMER STUDIES,
FACULTY OF HUMAN ECOLOGY
1
REFERENCES
• Rahmah Ismail (1996) Modal Manusia dan
Perolehan Buruh, Dewan Bahasa & Pustaka
• Jenkins, S (1991). The measurement of income
inequality. In L. Osberg (Ed.), Economic
Inequality and Poverty: International
Perspectives (pp. 3-38). New York, NY.: M. E.
Sharpe Inc
2
OUTLINE
• Introduction
– Factors influencing income differentials
• Income Distribution
– What does it mean?
– Measuring Income Distribution
• Lorenz curve
• Gini coefficient
– Income distribution in Malaysia
3
Introduction
• Compensation (perolehan)~ cash (i.e. pay) or inkind benefit obtained through one’s involvement in
the market
– (Money) Pay: E.g. salary/wages, bonus and other cash
allowances
– In-kind Benefits: E.g. company’s car and medical
insurance
• Income ~ (depending on is definition) is a broader
concept which may include:
– Compensation or earned income
– Unearned income such as rental, dividend and interest
– Transfer such as government welfare, zakat and
money received from children
4
Introduction … cont
• The distribution of compensation is very
important in analyzing the distribution of
income in certain country. WHY?
– More than 60% of incomes are in the form of
compensation (Kusnet and DaVanzo, 1980)
– Thus, income distribution is very much influenced
by the distribution of compensation
5
Introduction … cont
•
Human capital influences one’s earning, but Why people
have different income (note: including earning) ??
1. Ability
– Types of ability: aptitude, physical endurance &
effectiveness
•
Influenced by one’s heritage and childhood environment which
lead to different experience
– High capability (partly due to training) indiv get high
return
– Also depends on types of occupation and technology
6
Introduction … cont
2. Responsibility and risk
– Position in the organizational hierarchy
• ~ supervisor vs. supervisee
– Level of risk
• ~ mines vs. factory workers have different
pay though they are in the same job
category
7
Income Distributions
• The objective: to analyze how the economic wealth
of the nation is shared among its population
– i.e to assess the economic inequality in certain
country/place
– “A measure of how much access to and control over economic
resources one has over others across the population” (Jenkins,
1991)
– The proxy used is income because:
1. One of society’s economic resources
2. Measure one’s potential economic power
• But, the main concern of such analysis is NOT to
determine how income differs BUT, the inequality of
welfare among populations
8
Income Distributions … cont
• The Measurement
1.Mean/median income
2.Min vs Max
3.Theil Indeks – within & between groups
4.Lorenz Curve
5.Gini Coefficient
9
Income Distributions … cont
•
Lorenz Curve
– The percentage of total income received by any
percentage of income recipient when incomes are
arranged from the smallest to the largest amount
– Percentage of recipient
•
•
5 categories of income – quintiles (20% each)
10 categories of income – deciles (10% each)
10
Lorenz Curve
11
•
Assume there are 5 families and their total
(aggregate) income is $100,000. Income distribution
among these families are as follows:
% Families
0
Lowest 5th
Second 5th
Third 5th
Fourth 5th
Highest 5th
$ received
(ribu $)
$0
5
10
15
20
50
% $ received
0%
5
10
15
20
50
% cumulative % cumul. Point on
families
$ received LC
0%
20
40
60
80
100
0%
5
15
30
50
100
A
B
C
D
E
F
12
Income Distributions … cont
From the example:
•
Mean income
$20,000
Max vs. min
•
= $100,000 / 5 =
= $50,000 – $5,000
= $45,000
(Shows the range)
•
Lorenz dan Gini
•
Draw the graf and calculate the Gini coefficient
13
Income Distributions … cont
•
HOW TO DRAW A LORENZ CURVE ????
–
Hint: Plot the last 3 columns (refer the example)
•
•
•
–
Equally distributed – LC is a straight line. Why?
•
–
If there are > 5 income categories – smoother curves
Begin with ZERO FAMILIES = ZERO INCOME
Ends at the upper end, since 100% of the nation families MUST
necessarily receive ALL nation’s Income
Bottom 20% receive 20% of income etc etc….
In real life – income is not equally distributed
•
So, LC is a convenient means of visualizing the degree of
inequality
14
Income Distributions … cont
.
100
80
60
40
20
0
20
40
60
80
100
15
Income Distributions … cont
•
How to calculate Gini Ratio??
1. Calculate the area under the 45° line (Triangle)
½ x 100 x 100 = 5000
2. Calculate the total area of trapezoids under the
Lorenz curve -- A = ½ (h1 + h2)b
50 + 200 + 450 + 800 + 1,500 = 3,000
3. Area (1) minus area (2) = area LC
5,000 – 3000 = 2000
4. Gini = area (3) ÷ area (1)
= 2000 ÷ 5000 = 0.4
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Income Distributions … cont
•
Gini Ratio/Coefficient
– Is the ratio of areas BETWEEN the lorenz curve
and the 45° line AND the total areas under the
45° line
G = A ÷ (A + B)
A
B
17
Income Distributions … cont
•
Note:
G = A/(A + B)
– Perfect equality, G = 0
•
Everybody receive the same portion of the income
– Perfect inequality G = 1
•
•
All income is conquered by (only) few individuals leaving none to
others.
Therefore,
•
•
If Gini ratio ~ LC closer to equality line
If Gini ratio ~ LC closer to inequality line or LC farther
away from the equality line
18
Income Distributions In Malaysia
• In 1999:
– Top 20% receive an average income of RM 6,268
and the lowest 40% on average receive RM 865
• Between 1957- 1970 (Snodgrass, 1980)
– Suggested that the racial riots in May 13, 1969 was
partly due to a very serious socioeconomic
imbalances
– The overall inequality size during that period:
• Gini 1957-58 = 0.412
• Gini 1967-68 = 0.444
• Gini 1970
= 0.502
19
Income Distributions … cont
 Inter-racial inequality
 Ranking in receiving high income and low incidence of
poverty:
 Chinese, Indian, Malay
 Why?
 Need to examine historical, cultural and political background
 Occupational pattern (Bruton, 1992)
– Malay – mostly work in the traditional industries which has low
productivity
• Residential areas: urban vs. rural (Lim, 1971)
 Residential locations (Anand, 1983)
– Malay mostly live in states “less developed” states – North and east
20
Income Distributions … cont
• Distribution within each races
• Widening intra-ethnic inequalities especially
among Malays (Mazumdar, 1981)
• Inequalities within not between groups explained
much of income inequalities in Malaysia (Anand,
1983)
• 90% of the inequality arises from the large income
disparity within each group
• 95% of the overall inequality was due to
differences within ethnic groups (Sharifah 1995)
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-End-
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