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An Assessment of Relationship Between Growth and Inequality Using Micro Data from Thailand

Applying comprehensive decomposition analyses to the micro data from Thailand, this paper shows that growth and income distribution dynamics are closely linked through occupation, financial intermediation, and education. The compositional change of these characteristics accounts for more than half of the Thai inequality increase while it contributed to nearly forty percent of the Thai growth and poverty reduction between 1976 and 1996, which not only validates the empirical importance of the relationship between growth and income inequality that Kuznets (1955) speculated on, but also identifies the key factors through which they are linked. This study thus lays a cornerstone on the works searching for the relevant specification of underlying mechanisms of growth and inequality and the scope of potential policies for equity-enhancing growth. The orders of magnitudes of the compositional effects on growth are similar over these characteristics but their effects on income distribution dynamics sharply contrast. Financial deepening and educational expansion contributed to increase in inequality while occupational transformation did not so much contributed to inequality increase as to poverty alleviation. However, the effect of diverging income levels across income-status groups on inequality is most remarkable via occupation, suggesting the importance of a rise in skill premia on inequality dynamics along growth, which is the main factor together with the occupational transformation that shapes the aggregate inequality dynamics along growth as an inverted-U curve.