An analysis of income inequality in a developing country: Sri Lanka, 1985-1986 and 1990-1991

This dissertation analyzes income inequality and urban wage-income determination in Sri Lanka in 1985/86 and 1990/91, using household survey data from the Department of Census and Statistics. It addresses the questions: Did income inequality in Sri Lanka increase or decrease during this period? What were the sources of income inequality during this period? Had the relative importance of these sources changed between 1985/86 and 1990/91? What factors determined urban wage-incomes during this period?; Inequality comparisons were made using Lorenz estimates as well as a range of summary inequality indices. Sources of inequality were identified using source decompositions of the extended Gini index and subgroup decompositions of the Gini coefficient, Theil T and L indices. Spatial price-variation was eliminated from the distributions using a spatial price index. Income determining factors in urban wage incomes were identified using earnings functions corrected for household-level heterogeneity using fixed and random effects estimation. The gender wage-differential was decomposed into the effects of gender differences in mean endowments and a discrimination component. Our results showed that inequality declined between 1985/86 and 1990/91 when measured by indices that emphasized the lower part of the income distribution. Real incomes also declined during this period. Among sources of income, earnings contributed more to inequality than nonlabor income. Education, government employment and occupational variables were sources of inequality in the personal income distribution, and significant determinants of urban wages. Spatial and ethnic contributions to inequality were small. However, inequality was higher in the urban sector than in the rural and estate sectors. Patterns of inequality differed by gender: inequality between groups--by occupation, industry, government employment and education--was more important for females than for males, and increased during the period. Female wages were on average lower than male wages despite female advantages in endowments and returns to endowments. Changes in income inequality during this period were due to inequality-reducing changes in rural self-employment incomes and urban and estate wages and salaries, declining inequality between age groups, within spatial, ethnic and educational groups and declining inequality both within (for females) and between (for males) occupational and industrial groups.