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Contents Introduction

Indonesian income distribution measured in the Gini ratio has been improving since 1990 gradually. The paper tries to find out the factors that changed the ratio by using Jakarta, West Java and Central Java data of the Susenas survey. Firstly, using Susenas individual household data, variances in logarithm of individual household consumption level is calculated for years 1992, 1996, 1999, and 2003. Then, the paper tries to decompose changes in the variances from 1992 to 2003 into three components, population effect, income effect within same age groups, and income effect among different age groups. This decomposition indicates that the rises in variances were originated from the first effect, while the declines in variances were originated from the last two effects. Secondly, the paper investigates the population effect in detail and finds the following two important facts: (1) inequality increases gradually from age 23 to around age 55 and (2) inequality for ages 30 to 50 increases sharply. Due to the declining population growth rate and the expanding life expectancy rapidly since the 1980s, the population structure by age has been changing rapidly in Indonesia. The results imply that the shares of population for older generations will go up and their weights on inequality will get larger. The population structure shifting towards an aging society will push up inequality and will be a large factor to push up over-all inequality in the country.