Income Inequality in Indonesia: Which Aspects Cause the Most?

Inequality is one of the fundamental economic problems in Indonesia that has the potential to cause the non-optimal distribution of resources, economic instability, and may even lead to an economic crisis. This study discusses the three main aspects of inequality: the highest level of education attained, urban-rural area, and gender. Using IFLS data from 1993, 1997, 2000, 2007, and 2014, this study wants to enrich the empirical research, particularly the longitudinal studies. This study uses the Theil index for decomposition analysis and quantile regression analysis to analyze each class of income, particularly in the context of income inequality factors. The findings show that, for the gender aspect, male workers in the lower class have a greater income than female workers. In addition, for the education aspect, workers with an elementary school level experience higher inequality than workers with other levels of education do. Moreover, for the area aspect, higher inequality occurs for urban workers in both the upper and lower classes, compared to workers in rural areas. This study also conducts a quantile regression analysis to analyze each income class. The results show that, in terms of gender, income inequality between men and women is reducing. Women now have greater opportunities to earn higher incomes. Second, in relation to education, the number of completed years has less influence compared to that in earlier periods, because more and more people enter education to increase their income. The most recent trend is that education is perceived by the upper middle class, thus leading to income inequality. Lastly, urban workers have different incomes from rural workers, though the gap is reducing. It means both urban and rural workers have greater opportunities to earn a better income