Three-Part Composite Pareto Modelling for Income Distribution in Malaysia

Abstract

Income distribution models can be useful for describing the economic properties of a population. In this study, three-part composite Pareto models are fitted to the income distribution in Malaysia for the years 2007, 2009, 2012, 2014, and 2016. The three-part composite Pareto models divide the population into three parts, each following a different distribution model. The lower part follows the inverse Pareto distribution, the upper part follows the Pareto distribution, and the middle part follows another unspecified distribution model. For application in income data, the use of Gaussian mixture distribution is proposed for the middle part, making the inverse Pareto–Gaussian mixture-Pareto distribution model semi-parametric. From the model, it is found that the levels of income inequality in the lower and upper income groups decrease over the period of study. Additionally, the proportion of data following the inverse Pareto distribution in the model is highly correlated with the official absolute poverty incidence.