Dynamics of Wage Inequality in Thai Manufacturing Sector

Abstract

Economic growth, poverty, income inequality and how they relate to each other have long been the core issues in economic development. This paper seeks to investigate inequality by employing a regression-based decomposition method developed by Fields (2002). Instead of following prior work that explores household income, I choose to examine a major, if not the most important, component of household income — wage — because wage rates are much more precisely reported and measured. Using a dataset derived from the Thai Labor Force Surveys (1985, 1995 and 2005) and focusing on workers in the manufacturing sector, I find that in 1985, education, experience, and minimum wage zone were the three major factors influencing wage inequality. In 1995 and 2005, “occupation” replacing experience became another factor that had a substantial impact on inequality. An investigation into how wage inequality evolved over time using the Gini coefficient reveals that inequality increased from 1985 to 1995, but decreased from 1995 to 2005. Exploring which factors contributed such changes, I find that education, occupation, minimum wage zone, and urbanization played a key role in the increase in wage inequality during 1985-1995. The decrease in the Gini coefficient and wage inequality during 1995-2005, on the other hand, can be largely explained by education, urbanization, occupation, and domestic expenditure. Although education is the most important factor explaining the inequality in this paper, however; its impact on the inequality depends upon the level of education. In all study periods, elementary and lower secondary education reduced inequality, while any other education level such as postgraduate education worsened inequality. These empirical results provide some useful insights into how governments may prioritize their budgets so as to effectively tackle inequality.