Individual Income Inequality and Its Drivers in Indonesia: A Theil Decomposition Reassessment

Abstract

This article employs a Theil decomposition analysis to examine various dimensions of income inequality, using the 2007 Indonesian Family Life Survey. The empirical strategy is based on the individual-level income data—instead of group means as in the existing literature—and thus accounts for within-group dispersion of individual incomes. The decomposition exercise reveals that income inequality across education levels constitutes about 13 % of total income inequality. The urban–rural and interprovincial dimensions individually explain 6.0–6.5 %, but the contribution of income inequality by genders appears to be negligible. The findings highlight educational reform as an effective redistributive policy.