Forecasting Income Inequality with Demographic Projections

This paper provides a first attempt in the literature to forecast the future evolution of income inequality with the demographic projections. The contribution of this paper is twofold. First, we establish a framework to quantify and analyze the effects of population ageing and the secular upward trend in educational attainment on income inequality. Second, we modify the human capital model and perform microsimulations to forecast a list of standard measures of income inequality of Hong Kong for the coming years of 2021, 2026 and 2031 based on the projected changes in the demographic structure of Hong Kong’s working population. The pseudo out-of-sample forecasts are reasonably close to the corresponding realized values. Our true out-of-sample forecasts suggest that income disparity will be alleviated in the next 15 years, as a result of the increasingly equal spread of level of schooling across the workforce.