Determinants of Income Inequality among Korean Farm Households

We extend the existing regression-based inequality decomposition methods to account for different income sources and different income regimes, and adequately correct for selectivity into the different income regimes. We apply these extensions to data on Korean farm households, and find that they lead to different and more informative conclusions. We also find that the correction for selectivity is essential. In particular, our results show that much of the inequality in farm household income comes through variations in family size and composition and in land ownership. However, family size and land ownership contribute to income inequality mostly through farm income, while family composition contributes mostly through non-farm labor income. We also found that education contributes to income inequality mainly through its effect on non-farm labor income, but this result was obtained only after differentiating the decomposition results by income regimes. Overall, we found that non-farm labor income is an equalizing source of income while farm income is disequalizing. Our results imply that a continued increase in the variability of landholding distribution could worsen income inequality among farm households in Korea. ___________________________________________________________________ * Corresponding author (kimhi@agri.huji.ac.il). The order of authors is alphabetic and does not imply seniority. This research was initiated while the third author was visiting at the School of Economics at Sung Kyun Kwan University, and was completed while he served as a Visiting Professor at the Economic Research Center, School of Economics, Nagoya University. The Financial support of these institutions is gratefully appreciated. Introduction The purpose of this paper is to examine income inequality and its determinants among farm households in Korea. The issue of inequality received much attention in the economic literature in the last two decades, motivated by the recognition that inequality is not only an outcome of growth but also a determinant of growth. Recently, much concern has been expressed with regard to increased inequality in fast-growing economies such as China, India and Vietnam. The increased availability of suitable data has led to numerous empirical studies of inequality based on crosscountry data, labor force surveys, household surveys, and population censuses (Kimhi 2004). Much of this effort has been devoted to low and middle income countries. However, the methodologies used were in many cases adopted from more developed countries. For example, analysis of demand and supply factors in the evolution of wage inequality is perhaps suitable for an advanced economy in which the vast majority of the population is engaged in full-time wage employment, but not for a developing country with considerable self employment, informal employment and multiple jobholding. In this paper we adopt and extend regression-based inequality decomposition methods for the case of multiple income sources, and demonstrate their usefulness using data on Korean farm households. As can be seen in figure 1, income inequality is more pronounced among Korean farm households than in the Korean economy as a whole. Using a micro data set collected in 2003, we examine the contribution of various income sources, and their determinants, to overall income inequality of farm households. Heshmati (2004) reports that inequality can be “decomposed by subgroups, income sources, causal factors and by other socio-demographic characteristics” (page 1). Decomposition by population groups is perhaps the most popular of these, and will not be dealt with in this paper. Regarding decomposition by income sources, Shorrocks (1983) has shown that the “natural” decomposition rule of the Gini index of inequality is G(y)= Σk{2Σi[i-(n+1)/2]yi/n/μ}, where yk is income derived from source k, y is total income, G is the Gini index, μ is mean income, n is the number of households, and i is the rank of the household in the total income distribution. Therefore, the term inside the curled brackets, denoted S, is the contribution of yk to G(y), and the proportional contribution of yk, or the share of income from source k in total inequality, is s = S /G(y). Further, Lerman and