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Towards a better measure of income

inequality in Indonesia
a

Kunta Nugraha & Phil Lewis

University of Canberra
Published online: 21 Mar 2013.

To cite this article: Kunta Nugraha & Phil Lewis (2013) Towards a better measure of income
inequality in Indonesia, Bulletin of Indonesian Economic Studies, 49:1, 103-112, DOI:
10.1080/00074918.2013.772941
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Bulletin of Indonesian Economic Studies, Vol. 49, No. 1, 2013: 10312

TOWARDS A BETTER MEASURE OF

INCOME INEQUALITY IN INDONESIA
Kunta Nugraha*

Phil Lewis*

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University of Canberra
Indonesia has experienced significant economic growth in recent years (on average, 5% in 200008), but many people are still living in poverty. Income inequality,
as measured by the official Gini coefficient, has also increased. This paper evaluates household income and income inequality in Indonesia, assessing both market
and non-market income to reach a more accurate measure of how actual income
affects living standards. We find that if household income considers non-market income, income distribution is significantly more balanced, the coefficient of income
inequality falls from 0.41 to 0.21 and the income share of the populations poorest
deciles increases more than fivefold. The results suggest that market income alone
is a misleading measure of income distribution in Indonesia.

Keywords: net income, actual income, income distribution, income in kind, consumption
of own production
INTRODUCTION
According to Badan Pusat Statistik (BPS), Indonesias Central Statistics Agency,
15.4% of Indonesias population, or around 35 million people, were poor in 2008,
a percentage that has since decreased (BPS 2010). At the time, BPS set the poverty
line, or the basic-needs approach for food and non-food, at Rp 182,636 per capita
per month, or $33.80 using purchasing-power parity (PPP). Indonesias official
Gini coefficient, with which BPS measures inequality by capturing household
consumption per capita, had been stable at around 0.30 in 19982001 but rose
in 2002. Leigh and Van der Eng (2010) found that the Gini coefficient based on
household consumption is lower than that based on earned household income,
owing to the smoothing effects of saving and borrowing.
BPS publishes the Gini coefficient only periodically, but Cameron (2002) lists
the Gini coefficient from both Asra (2000) and Booth (2000) during 196499, in
which it ranges from 0.32 to 0.38. Figure 1 shows that the increase in Indonesias official Gini coefficient after 2001 was not accompanied by an increase in the
number of poor. According to data from both BPS and the World Bank, whose
*

The authors are grateful to Tesfaye Gebremedhin, Muni Perumal, Yogi Vidyattama, Riyana Miranti and Ross McLeod for their valuable and helpful comments. We also received
many comments from participants at the 40th Australian Conference of Economists, in
2011. Responsibility for the final version is that of the authors.
ISSN 0007-4918 print/ISSN 1472-7234 online/13/010103-10
http://dx.doi.org/10.1080/00074918.2013.772941

2013 Indonesia Project ANU

104

Kunta Nugraha and Phil Lewis

FIGURE 1 Indonesias Poverty Rate and the Gini Coefficient, 19982011 a










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!
 

Includes predicted figures for 200911 for the Gini coefficient and the poverty rate based on the
World Bank definitions. See the text for the BPS and World Bank definitions of poverty.
Source: Ministry of Finance (2012).

average poverty line for developing countries sits at $2 per capita per day, or $60
per month (World Bank 2009), the number of poor in Indonesia has decreased
since 1999 (figure 1). The data suggest that the increase in income at the bottom of
the distribution is less than the increase at the top of the distribution, indicating
a wider dispersion. However, annual increases of around 5% in average income
during 19982008 reduced the number of poor in Indonesia by around 8% each
year.1
This paper evaluates different measurements of household income distribution
in Indonesia. Previous studies (Cameron 2002; Lanjouw et al. 2002; Chung 2004)2
have used household consumption to measure income inequality, because
consumption data are generally more reliable than income data and are a better
indicator of a households permanent income (Deaton 1997). Here, we evaluate
income inequality by using household income (comprising both market and nonmarket income) to strengthen the literature on income inequality in Indonesia.
In a country such as Indonesia, market income may not capture all of the
components of actual income, which includes, for example, consumption of own
1 Economic growths role in reducing poverty has been demonstrated elsewhere.
Cameron (2002) found that Indonesias rapid rate of average real economic growth (7.1%
per annum) during 196897 did not change inequality levels markedly. Fields et al. (2003)
demonstrated that in Indonesia, South Africa, Spain and Venezuela, those with the lowest
average household incomes enjoyed the most favourable income changes during the 1990s.
2 Leigh and Van der Eng (2010) compare expenditure- and income-based Gini ratios for
19822004 and then use the household income data to analyse trends in top income.

Downloaded by [203.6.149.71] at 22:51 19 March 2015

Towards a better measure of income inequality in Indonesia

105

production (a households consumption of the goods it produces itself, such as

vegetables) and income in kind (income received in such forms as gifts, money
transfers, company cars, meals and barter trade). Kusnic and Davanco (1986)
maintain that in developed countries, households once produced many goods
and services now supplied by the market. In developing countries, traditional
measures that exclude household production under-estimate the actual income
of the poor. Similarly, expenditure data that include only market purchases will
also significantly under-estimate actual income and consumption.
This paper uses the household characteristics (module) and individual characteristics (core) of the 2009 National Socio-Economic Survey (Susenas) to calculate
income distribution and adjusted income per capita for market income and actual
income. The term actual income refers to all market and non-market income that
affects household living standards. Actual income comprises household market
income, consumption of own production and income in kind. Evers (1981) concluded that, at the time, subsistence production was the third most important
sector in the Indonesian economy, behind the formal and informal sectors. Today,
subsistence-oriented monoculture production in agriculture, for example, is as
important as ever, yet consumption of own production and income in kind have
not contributed to analyses of income distribution in Indonesia.
The Susenas core and module data allow us to incorporate personal
information, such as the age of each household member, in our analysis. We have
taken household market income, that is, income after income tax, from the 2009
Susenas. Non-market income also includes consumption of own production,
income in kind, and other income calculated using the household expenditure
module and imputing non-market income to households.
The first and second sections of this paper explain, respectively, our methodology
and use of data. The third section discusses our findings, and the fourth section
concludes.
METHODOLOGY
This paper calculates household market income using the household income
reported in the 2009 Susenas. BPS (2009) defines market income as:
wages and salaries, including money, goods and services;
business income, including food agriculture, other agriculture (such as nonfood agriculture, farming, fisheries, forestry and hunting) and non-agriculture
(such as industry, trade, transportation, service, construction and mining); and
non-business income, including income from rent and other assets (such as
interest, dividends, royalties and land rents).
Our analysis of Susenas data from block 5 (household income and expenditure) revealed that survey participants rarely include goods and services (that is,
their non-market income) in their responses to questions about their income. For
example, the data contains gaps between market income plus financial income
and household consumption minus own production, and between total household income and total household expenditure. Respondents rarely include their
non-market income in Susenas, but they often include all of their consumption
expenditure; non-market income should be added to the income they receive

106

Kunta Nugraha and Phil Lewis

from wages and salaries in kind, gifts, or other unidentified income. Susenas also
captures data for household consumption from the week of the survey, and asks,
for example, how many eggs did you eat in the last week?. Participants tend to
report all they eat, even though they may not have purchased all of it (it may have
been provided by employers, for example, or obtained through bartering).
The formula for income in kind is as follows:

n
(1)
Yki = Exi Yni Coi Fi

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i=i

where Yki is the income in kind of household i; Exi is the total expenditure of
household i, including financial expenditure (such as savings, debt payments,
insurance premiums and loans); Yni is the net income of household i; Coi is the
consumption of own production of household i; and Fi is the financial income of
household i (such as withdrawals, credit payments, insurance claims and borrowings). We introduce financial income and financial expenditure to capture saving
and borrowings role in financing expenditure. Here, income in kind is the part of
household total expenditure that is not financed by, for example, market income,
financial income or consumption of own production.
We add consumption of own production to market income, because this
consumption can significantly increase a households standard of living. We
combine household income data and household expenditure data from Susenas,
to analyse the quantity and value of each households consumption of own
production. BPS (2009) calculates the value of consumption of own production
based on the relevant regions market price and adds it to consumption
expenditure.
Previous studies (Cameron 2000; Leigh and Van der Eng 2010) have calculated
Indonesias Gini coefficient using food and non-food consumption (Susenas
block 4.3), which is similar to BPSs method. These studies equate household
consumption to household expenditure, but, as our analysis of Susenas block 5
reveals, household consumption differs from household expenditure. We use total
household expenditure, which captures income in kind and unreported income
(the difference between total expenditure and total income).
Before calculating the effect of total household expenditures on income
distribution, we divided both categories of income, that is, market income
and actual income, by equivalence scales, to account for household size and to
determine adjusted per capita income. Equivalence scales compare the income
levels of households of different size and composition a larger household
needs to have a higher level of income to achieve the same standard of living as
a smaller household (ABS 2007). Such scales recognise that the economic needs
of additional adults and children in households are not equal to the economic
needs of the first adult and child. Many elements determine the economic need
of each household member. Working adults, for example, incur transportation
costs, and older children cost more to raise than young children. The most
common equivalence scale is that modified by the OECD (Hagenaars, de Vos and
Zaidi 1994). However, Ree, Alessie and Pradhan (2013) argue that this scale is
not appropriate in Indonesia, in which households spend, on average, a larger
fraction of their total budget on food than do households in OECD countries.

Towards a better measure of income inequality in Indonesia

107

To simplify the measurement of adjusted per capita income, we use an

equivalence scale that assigns different weights to each household member: the
first adult is assigned 1 point, each additional person above 15 years is assigned
0.5 points, the first child under 15 years is assigned 0.5 points and each additional
child under 15 years is assigned 0.35 points (Ree, Alessie and Pradhan 2013).
Following the approach of Kim et al. (2006), we define children as those under
15 years and adults as those over 15 years. The formula for adjusted per capita
income is as follows:

Yi
(2)
Yeq =
ai1 1 + ni ai1 0.5 + 0.5 aic + nic aic 0.35

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) (

) (

where Yeq is adjusted per capita income; Yi is household income; ai1 is a dummy
variable that takes the value of 1 or 0, indicating whether there is at least one adult
in the household, i; ni is the number of adults in the household; aic is a dummy
variable indicating whether there is at least one child in the household; and nic is
the number of children in the household.
We used four ways of calculating the effects of all income categories on income
distribution:
Nominal and share terms: In nominal terms, we used US dollar values, to enable
international comparisons and to use PPP to account for price differences. The
average PPP exchange rate in 2008 was Rp 5,410 = $1. Price differences across
regions are important, especially in Indonesia, but they are hard to measure,
since only inflation rates (and not price indexes) are available for each region.
In share terms, we divided the income of each group by the aggregate income
of the population.
Income groups: We ranked the household samples from the lowest to the highest,
on the basis of their adjusted income, and then divided them into deciles. Each
decile contained 5,754,867 weighted households. Comparing the share of these
income deciles gives the dispersion of household income.
Gini coefficient and percentile ratios: The Gini coefficient is a well-known
indicator of income inequality. The formula is as follows:
Gini =

n
i=1
nj=1 Yi Y j
2n ( n 1) Y

(3)

where Yi and Yj are individual incomes with a mean of , and where n is the
total number of observations (Rosen and Gayer 2008). A higher figure indicates
a higher level of income inequality.
Decile earnings compared with median earnings: Comparing the earnings
of the lowest and highest deciles relative to median earnings
gives the dispersion of earning (Lewis et al. 2010). The formula is:
P10
P90
(4)
and D =
P50
P50
where D is the dispersion of earning, P10 is the lowest percentile of earnings,
P50 is median earnings and P90 is the highest percentile of earnings.
D=

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108

Kunta Nugraha and Phil Lewis

DATA
Susenas collects data annually from a sample of households that are individually weighted to represent the Indonesian population. The Susenas core collects
individual and household characteristics, such as age, employment status, health,
education level and housing type, whereas the Susenas module collects information on specific topics, such as household consumption and expenditure, in threeyear cycles. At the time of our research, the most recent Susenas core data were for
2008 (2009 publication) and were collected from 1,142,675 individuals and 282,387
households; the latest module data on consumption and expenditure were also
for 2008, and were collected from the same number of households. To capture
a complete set of information on households and their individuals characteristics, consumption patterns, per capita expenditure and income distribution, we
merged Susenas core and module data the first such merging of individual and
household data from Susenas.3
One problem of using Susenas data is the potential under-representation of
the very wealthy and the very poor (Cameron 2002); the former tend to refuse to
respond to the questions of the BPS officers, and it is hard to collect data from the
latter. As in the household surveys of some other countries, the highest earners
especially the top 10% receive only limited statistical coverage (Deaton 1997).
This gap in Susenas data is borne out by the substantial discrepancy between total
household expenditure estimated from Susenas and the total private consumption
component of GDP (Leigh and Van der Eng 2010). With this in mind, the results
of this paper should be considered as representing all but the very poorest and
richest households in Indonesia.
FINDINGS AND DISCUSSION
We calculated three types of adjusted income for comparison: per capita income;
adjusted per capita income, based on the equivalence scale of Ree, Alessie and
Pradhan (2013); and adjusted per capita income based on the OECD equivalence
scale. Our results differ slightly for certain household types by income quintile,
but they were not significantly altered by our choice of method. To capture
the impact of household size, then, we present only those results based on the
equivalence scale above.
Table 1 shows the distribution of adjusted per capita market, non-market and
actual income for each decile. It shows that the dispersion of actual income is
greatly reduced after adding income in kind and consumption of own production
to all market income, which comprises net income and financial income. The
proportion of income by household in the highest decile is 32.0% for market income
and 22.2% for actual income; in the lowest decile, these proportions are 2.2% and
8.1% respectively. Actual incomes share in the lowest decile, by market income,
is higher than that in the second to fourth deciles. The poorest benefit more from
non-market income than those in the second to fourth deciles. The dispersion of
income in kind and consumption of own production for each household group
is fairly systematic in reducing the level of inequality between income groups.
3 Leigh and Van der Eng (2010) summed individual data to household levels for 1999 and
2002.

Towards a better measure of income inequality in Indonesia

109

TABLE 1 Household Per Capita Income in 2008, by Decile

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Market Income

2008 PPP$a
Lowest
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Highest

All Market
Income

Non-market Income
Consump- Income in
tion of Own
Kind
Production

Actual
Income

Net
Income

Financial
Income

143
339
443
545
652
770
920
1,100
1,433
3,225

111
134
127
133
147
152
171
191
214
417

254
473
571
678
800
922
1,091
1,291
1,647
3,641

215
215
215
221
209
197
194
177
149
118

1,121
654
608
599
602
564
539
551
599
623

1,590
1,342
1,394
1,497
1,611
1,683
1,824
2,019
2,395
4,383

1.5
3.5
4.6
5.7
6.8
8.1
9.6
11.5
15.0
33.7

6.2
7.5
7.1
7.4
8.2
8.4
9.5
10.6
11.9
23.2

2.2
4.2
5.0
6.0
7.0
8.1
9.6
11.4
14.5
32.0

11.3
11.2
11.3
11.6
11.0
10.3
10.2
9.3
7.8
6.2

17.4
10.1
9.4
9.3
9.3
8.7
8.3
8.5
9.3
9.6

8.1
6.8
7.1
7.6
8.2
8.5
9.2
10.2
12.1
22.2

Total
%
Lowest
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Highest

a PPP$ = purchasing-power-parity dollars.

Source: Authors calculations based on data from the 2009 Susenas module.

Income in kind and consumption of own production are important for all income
groups, including the richest households.
Actual income is significantly higher than all market income in all deciles. For
example, in the lowest decile, actual income, $1,590, is more than six times all
market income, $254. For households in the lowest decile, non-market income
plays a big role in increasing the standard of living. Even for the highest decile,
actual income is around 20% higher than all market income. There is far less
inequality in actual income than in market income. This finding is in line with
those of Evers (1981) and Ravallion and Dearden (1988). Evers (1981) finds that
subsistence production plays a major role in the household economy in Indonesia,
particularly for the poor. Ravallion and Dearden (1988) mention the significant role
of moral economy in Java, since there is no social-security system in Indonesia.
Moral economy is the transfer payment of money or goods from rich to poor
households.

110

Kunta Nugraha and Phil Lewis

TABLE 2 Sources of Adjusted Household Actual Per Capita Income in 2008

(%)
Market Income
Wages and
Salaries

Business
Income

Nonbusiness
Income

Lowest
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Highest

2.9
5.2
4.8
4.6
4.3
3.9
3.5
3.3
2.9
2.0

2.7
12.1
18.0
22.2
26.2
31.2
35.7
39.6
45.2
58.2

3.4
8.0
8.9
9.5
10.0
10.7
11.2
11.5
11.8
13.4

7.0
10.0
9.1
8.9
9.2
9.0
9.4
9.5
8.9
9.5

13.5
16.0
15.4
14.7
13.0
11.7
10.6
8.8
6.2
2.7

70.5
48.8
43.6
40.0
37.4
33.5
29.6
27.3
25.0
14.2

All households

3.4

34.5

10.5

9.1

9.7

32.7

Decile

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Non-market Income
Financial Consump- Income in
Income tion of Own
Kind
Production

Source: Authors calculations based on data from the 2009 Susenas module.

Table 2 shows the sources of per capita income in each household group. In
the lowest and second deciles, the largest source of income is income in kind and
consumption of own production. These findings have implications for taxation.
For households in these deciles, most of their income is non-market income; lowincome households pay less income tax than other deciles. In the third to sixth
deciles, most income comes from income in kind and then from business income.
Taxes are paid on business income but not on income in kind. In the seventh
to highest deciles, most income comes from business income and then from
income in kind. The amount of tax paid is higher than that paid by households
in other deciles, because most of the income is from business income. Even those
households in the highest deciles have some consumption of own production.
The share of financial income in adjusted per capita household income is similar for all deciles. We can speculate that most financial income in the lowest deciles
comes from borrowing and in the highest deciles from saving.
Income inequality
Two of the most common ways of measuring income inequality are the Gini
coefficient and relative percentiles. Table 3 shows that the Gini coefficient for
adjusted per capita net income is 0.41. Within a range of 0 to 1, a value of 0 means
perfectly equal and 1 means perfectly unequal (Lewis et al. 2010). Adding financial
income to net income reduces the Gini coefficient to 0.40, indicating a lower level
of inequality. When income in kind and consumption of own production are also
included, the Gini coefficient reduces further, to 0.21 (table 3). Non-market income
improves the standard of living of the lowest income group most, which also
reduces income inequality. If we compare this Gini coefficient with that of BPS,

Towards a better measure of income inequality in Indonesia

111

TABLE 3 Inequality Measures of Adjusted Per Capita Income in 2008

Net Income

All Market Income Actual Income

Gini coefficient

0.41

0.40

0.21

Percentile ratios
P90/P10
P90/P50
P10/P50
P75/P25

9.67
3.27
0.34
2.48

7.28
3.07
0.42
2.26

2.48
2.06
0.83
1.35

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Source: Authors calculations based on data from the 2009 Susenas module.

the level of income inequality in Indonesia is much lower than the official level:
using expenditure data for individual households, we calculate a Gini coefficient
of 0.31, which, based on grouped data, is comparable with BPSs estimate of 0.37.
This alternative calculation of the Gini coefficient points to a lower level of
income dispersion than that measured by BPS and the World Bank, as measured
by relative percentiles. The ratio of the lowest 10% to the median of income
changes from 0.34 to 0.83 that is, the income of the lowest decile increases from
34% of the median income to 83%. The ratio of the highest 10% of incomes to the
median of income changes from 3.27 to 2.06. This means that the market income
of the highest-earning households is around 3.3 times the median income, but this
falls to around 2.1 times when actual income is used.
CONCLUSION
Indonesias poverty rate has fallen rapidly since 2000 but is still higher than
that of most of its neighbours. In 2008, the proportion of the population living
on less than $2 a day (at 2005 international prices) in Indonesia was 54.4%,
compared with 53.3% in Cambodia and 43.4% in Vietnam (World Bank 2012). To
reduce poverty and improve income distribution, it is necessary to start with an
appropriate measure of income inequality. In this paper, we use a broad definition
of income for this purpose, and include both market and non-market income in
our calculations of total household income. All income groups in Indonesia earn
non-market income, but households in the lowest income deciles have a larger
proportion of non-market income than the highest income groups.
Our results suggest that measuring income inequality in Indonesia without
assessing non-market income gives misleading results, and that non-market
income contributes significantly to lower levels of income inequality. The
dispersion of actual income is more balanced after adding income in kind and
consumption of own production to income calculations, because both components
have the potential to increase the income of the lowest- and middle-income
groups. Calculating the Gini coefficient and dispersion of income using market
income alone the method used in most developed countries is not suitable for
Indonesia.

112

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