The Measurement of Income Distribution Dynamics when Demographics are correlated with Income

The purpose of our paper is to derive instructive analytics on how to account for differentials in demographic variables, and in particular mortality, when performing welfare comparisons over time. The idea is to “correct” in various ways estimated income distribution measures for “sample selection” due to differential mortality. We implement our approach empirically using three waves (1993, 1997 and 2000) of the Indonesian Family Life Surveys (IFLS). We distinguish the direct effect of mortality, i.e. individuals who die are withdrawn from the population and no longer contribute to monetary welfare, from the indirect effect, i.e. the impact on survivors pertaining to the same household of dead individuals, who may experience a decrease or an increase in monetary welfare. For the case of Indonesia, we show that the direct and indirect effects of mortality on the income distribution have opposite signs, but have the same order of magnitude. We also show that the effect of other demographic changes, like changes in the structure of fertility, migration, and educational attainment, dominate the effects of mortality, whether direct or indirect. However, we find that none of these demographic developments are large enough to explain a significant part of the change in income distribution, whether the pre-crisis period (1993-1997) or the post-crisis period (1997-2000) are considered.