Discussion Paper No. 187 of 2015 on Evolution and Decomposition of Income Inequality in Kenya

Abstract

This study traces the evolution of income inequality in Kenya and also decomposes income inequality. Various inequality measures are computed using the 1994 Welfare Monitoring Survey and the Kenya Integrated Household Budget Survey 2005/6, which are both nationally representative datasets. The estimations were performed using the Distributive Analysis for Stata Package. A key finding is that income inequality is sensitive to the part of the income distribution given more weight and there is no correspondence in the changes in inequality over time between urban and rural regions. If more weight is given to high incomes, rural inequalities actually worsened while urban inequalities improved. On the other hand, if more weight is given to the bottom of the distribution, urban inequality worsened while rural inequality eased. Even though more urbanized regions have higher incomes, they also exhibit relatively higher levels of income inequality. Decomposition of inequality by locality (urban versus rural) indicates that about 78 per cent of inequality can be attributed to inequality within urban and within rural areas. Decomposition by level of education suggests that the more educated group has a more unequal income distribution. Two broad conclusions emerge: the first is that measures to reduce the rural-urban income gap would have relatively limited impact in reducing total inequality, and the second is that interventions to enhance access to education would require other contemporaneous interventions to reduce inequality.