DRAFT EPD INCOME DISTRIBUTION PROJECT DATA ON INCOME DISTRIBUTION IN PANAMA Jong-goo Park Division Working Paper No.1981-3 March 1981 Economic and Social Data Division Economic Analysis and Projections Department Development Policy Staff The World Bank Division Working Papers report on work in progress and are circulated for Bank staff use to stimulate discussion and comment. The views and inter- pretations in a Working Paper are those of the author and may not be attri- buted to the World Bank or its affiliated organizations. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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DRAFT
EPD INCOME DISTRIBUTION PROJECT
DATA ON INCOME DISTRIBUTION IN PANAMA
Jong-goo Park
Division Working Paper No.1981-3March 1981
Economic and Social Data DivisionEconomic Analysis and Projections DepartmentDevelopment Policy StaffThe World Bank
Division Working Papers report on work in progress and are circulated for
Bank staff use to stimulate discussion and comment. The views and inter-
pretations in a Working Paper are those of the author and may not be attri-
buted to the World Bank or its affiliated organizations.
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DATA ON INCOME DISTRIBUTION IN PANAMA
This paper contains an evaluation of the income distribution data
from a 1970 survey on household income in Panama. Under-reporting of
overall income in the survey was not very large. However, the survey
under-represented non-employees, particularly those in metropolitan
areas. Hence, the survey data on distribution of non-employee income
was adjusted, and a more representative distribution of income was
derived for the country.
Economic and Social Data DivisionEconomic Analysis and Projections Department
- March 1981
TABLE OF CONTENTS
Page
I. Introduction .................................................... 1
II. The 1970 Special Survey on Household Income (EEIH) ............. 1
III. Evaluation of the 1970 EEIH .................................... 3
IV. Data Adjustment and Estimation of Income Distribution ............8
V. Concluding Remarks ............................................. 11
1. There have been three main sources of information on income
distribution in Panama. The World Bank Social Indicators Data Sheet for
Panama shows a suimmary of an estimate of Panama's income distribution by
household for 1970. This estimate was based on data on income distribution
for 1969 prepared by McLure, Jr.(1969) and updated by a Bank mission to the
country in 1973. The McLure data appear to have been derived from various
sources, including an annual survey of the labor force. As detailed background
materials for these data were not available, we could not assess their qniality.'i
2. The Direccion de Estadistica y Censo has been undertaking the annual
survey of the labor force since 1963. The Encuesta de Mano de Obra, however,
collects information only on income of employees holding a regular,
remunerated job.
3. The 1970 Encuesta Especial sobre Ingresos a Traves de los Hogares
CEEIH or Special Survey on Household Income) was the first nationwide sample
survey on household income in Panama. This paper evaluates the 1970 EEIH
data and, based on this, derives an estimate of the distribution of income by
household for 1970.
II. The 1970 Special Survey on Household Income (EEIH)
The 1970 EEIH was carried out by the Direccion.de Estadistica y
Censo, with technical assistance from the United Nations Development
- The report by the Bank mission noted that (a) "there was no recent householdincome survey in Panama" to provide data for the estimation of the country'sincome distribution, and Cb) the Bank mission's estimate of incomedistribution was "unsatisfactory." (See World Bank Report No. 275-PAN,Vol. II, November 13, 1973, pp. 40-41).
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Programme. The main objective of the survey was to obtain information on
the pattern of income distribution in the country.
5. The survey covered all private households in the country, except
for those located in the Panama Canal Zone/l and in areas where access was
difficult and the interview costs would have been too high. The survey
sample contained 5,185 private households, about 2% of total households in
the country. Out of the total sample, 2,374 households were from metro-
politan areas - and 2,811 from the rest of the country. The sample house-
holds were selected in the following manner.
a. Metropolitan Areas
6 . In the cities of Panama and Colon, two strata were created: areas
with dwellings built before and built after the 1960 census respectively.
The primary sampling unit (PSU) in the first stratum was every other of the
areas that has been selected for the labor force survey. In the second
stratum, the PSUs were systematically selected from a list of clusters of
three dwellings built after the 1960 census, using one-half of the sampling
fraction used in the labor force survey. In the other metropolitan areas,
the PSUs were selected from the new census segments used to list population
and dwellings in 1970.
b. Rest of the Country
7. The 1970 ce~nsus was used as the sampling frame for the rest of the
country. The areas were divided into three strata: urban, rural and difficult
access. For the urban and rural strata, the PSUs were systematically selected
/1 People living in the Canal Zone are mostly foreigners.
/2 The metropolitan areas include the districts of Panama, Arraijan, La Chorrera,Capira and part of the Chepo district (i.e., Corregimiento Cabecera and Santa JCruz de Chinana) in the Province ofPanama and the districts of Colon, Charges,Portobelo and Santa Isabel in the Province of Colon. The population in themetropolican areas accounted for 41% of the country's population in 1970.
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from a list of segments arranged in geographical order. No PSUs were selected
from the areas of difficult access. All households included in the selected
PSUs became sample households.
8. The sample households in the metropolitan areas were interviewed
durii,: the period January 15-30, 1971, those in the rest of the country during
the period February 8 - March 9, 1971. The reference period for information
on income was the calendar year 1970.
9. A household was defined as a single person or group of persons living
together under family conditions. Boarders, relatives, guests and domestic
workers permanently living in the household were included as household members.
People who normally were members of the household but were absent during part
of the reference period for work,study, medical care or vacation were included
as household members. /
10. Income was defined as gross income (without any deductions for direct
taxes and social security contributions) and included income both in cash and in
kind and transfers.
III. Evaluation of the 1970 EEIH
a. Sampling arnd Non-Sampling Error
11. As mentioned earlier, the 1970 census data were used as the sampling
frame for all areas other than the cities of Panama and Colon. Since the
census period coincided with the reference period of the 1970 EEIH, the sample
for the survey was considered appropriate. According to.the survey report,
sampling errors calculated for some statistics on income were relatively small.
The coefficient of variat-lon was calculated to be 4.2% foy the total household
/1 This implies that people staying in institutional households duringpart of calendar year 1970 were covered by the survey.
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income and 4.3% for total factor income.
12. Information was collected for 4,460 households out of the total
sample of 5,185 which produced a relatively high rate (14%) of n:-t.--meration
(the non-enumeration rate was virtually the same for both the metropolitan
areas and the rest of the country).'l Because of a lack of relevant data,
it was not possible to assess the effects of non-enumeration on the survey
results. The sample of 4,460 households was, in any event, still relatively
large.
b. Bias in the Composition of the Sample
13. The EEIH survey report includes information on the composition of
the labor force by employees and non-employees. A comparison with the
results of the labor force survey suggests that the EEIH survey under-
represented non-employees, particularly those in non-agricultural sectors
in metropolitan areas (Table 1). Normally, the distribution of non-employees'
income is less equal than that of employees' income. If so, the under-coverage
of non-employees in the EEIH survey might have introduced a bias-toward more
equal distribution of income. The survey under-represented employees in the
agricultural sector but over-represented employees in the non-agricultural
sector. For the country as a whole, however, the survey coverage of employees
is almost complete. This can be explained by the fac?: that as in other
developing countries, laborers in the rural area often have multiple jobs,
and some of these laborers covered by the labor survey could have been working
in the non-agricultural sectors during the EEIH.
/1 In addition, information was collected from 16 households which wereselected from a special listing for "very high income" households.
/2 Non-employees refer to employers and the self-employed.
Source: Controller General, the Government of Panama.
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17. The average income of non-employee households in the metropolitan,
non-agricultural sector was much lower than that of employee households and
appears to be unrealistic (Appendix, Table A-1). Most probably, the survey
left out those income-earning household members from non-employee households
in non-agricultural sectors (see para.13).
IV. Data Adjustment and Estimation of Income Distribution
18. As mentioned earlier, the under-reporting of overall income in the
1970 EEIH was not very large. However, the survey's under-coverage of non-
employee (employer/self employed) households suggests that the survey data
on the distribution of household income may have some systematic bias. There
are no data, however, that provide information even for the average incomes
of the non-employee households which were not covered by the survey.
1. Table 1 (p. 5) suggests that the non-employee households in the
rest of the country which were not covered by the survey were mainly farm
households. The survey data on income distribution in the rest of the coun-
try show that the two lowest income classes have a relatively low ratio of
income earners to total household members. However, we normally expect
that in low-income households, more family members would be working to
supplement the income of the household head. We therefore assumed that those
non-employee income earners in the non-metropolitan areas who were left out
in the survey belonged to the two lowest income classes. Thus we distributed
these income earners into those two income classes in proportion to the distri-
bution of income earners already covered by the survey. Total income of the
two lowest income classes,were accordingly adjusted, based on the assumption
that the average incomes of the newly included income earners were equal to
the average factor income reported for the two lowest income classes (Appendix,
Table A-4).
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20. Regarding the non-employee income earners in the metropo1itan
areas who were not covered by the survey, we assumed that the pattern of
their income distribution was the same as that for the non-employee income
earners who were covered by the survey. Thus we adjusted the survey data
on distribution of non-employee income for the metropolitan areas such that
the aggregate income of the newly included income earners (including those
mentioned in para. 19 above) plus the total factor income from the original
survey data was equal to the total personal income in the national accounts
(Appendix, Table A-5).
21. Using the adjusted data (paras. 19 and 20) and the survey data on
the distribution of employee income and transfer income, we estimated the
distribution of income by household for 1970 (Table 3 and Appendix Table A-8).
The distribution of income by decile household groups derived for the metro-
politan areas-and the rest of the country is shown in Appendix Tables A-9 and
A-10 respectively.
22. We compared these estimates of income distribution in Panama with
those derived from the unadjusted EEIH data and with that shown in the World
Bank Social Indicators Sheet for Panama. The Differences between the estimates
derived from the adjusted and unadjusted EEIH data were not very significant,
as only marginal adjustments had been made to the original EEIH data. On the
other hand, the differences between the estimates as derived in para 21 above
and those appearing in the Social Indicators Sheet were-quite significant.
Both estimates did, however, show a relatively high inequality in the distri-
bution of income (Table 42. Relevant data which can explein the differences
between the latter two estimates are not available (see para. 1).
I .',,
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Table 3: INCOME DISTRIBUTION IN PANAMA, 1970
Cumulative % of Cumulative % o5Households Household Income -
10 0.7
20 2.0
30 4.0
40 7.2
50 11.9
60 18.2
70 26.6
80 38.2
90 55.8
95Lb 77.9/b
100 100.0T
Gini Coefficient 0.571
/a Household income before payment of direct taxand social security contribution.
/b Derived through linear interpolation.
4r
Table 4: INCOME INEQUALITY MEASURES BASED ON DIFFERENT ESTIMATES, 1970
Share (%) in Total Household IncomeLowest Lowest Highest Highest
Gini 20% of 40% of 20% of 5%O of
Data Source Coefficient Households Households Households Households
EEIH (Adjusted) 0.571 2.0 7.2 61.8 22.1
EEIH (Unadjusted) 0.569 1.8 7.0 61.3 21.7
Social Indicators Sheet 0.491 2.1 9.5 52.7 17.8
V. Concluding Remarks
23. We estimated the distribution of household income in Panama for 1970,
using data from the countryts first national household survey. We found that the in-
equality in income distribution by household in Panama is relatively high. Tnis may
reflect the dualistic structure of the country's economy (i.e., the coexistence of
a large number of subsistence farms and well-developed commercial farms and modern
service sectors). Further, income in the survey referred to gross household income
before payment of direct taxes. To the extent that the rate of direct tax is
progressive, the income distribution estimate derived from the survey data may
overstate income inequality.
24. The survey data used for the income distribution estimate appear to
be of good quality in getieral. However, the data on the income of non-employee
households may be less reliable. This would be mainly because the recall period for
the income questionnaire in the survey was one year, and it must have been difficult
for non-employee households to.recall their generally irregular yearly incomes.
4V
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REFERENCES
1. Direccion de Estadistica y Censo,-Encuesta Especial Sobre Ingresosa Traves de los Hogares: Ano 1970, Estadistica PanamenaAno XXXIV, Suplemento, 1975.
2. , Estadistica Panamena, Series 0: Estadisticas delTrabajo (Encuesta de Mano de Obra), Ano 1970, 1972.
3. McLure, Jr., C.E., "The Distribution of Income and Tax Incidencein Panama, 1969," Paper No. 36, Program of DevelopmentStudies, Rice University, Houston, Texas, Winter 1969.
4. World Bank,-Report on the Economy of Panama, Vols. I, II, III and IV,Report No. 275-PAN, November 13, 1973.
5. , Social Indicators Data Sheets, August 1979.
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APPENDIX TABLES
Table A-1: AVERAGE ANNUAL INCOME OF EMPLOYEES' AND NON-EMPLOYEES t
HOUSEHOLDS, 1970
(Balboas)
Metropolitan Rest of theAreas Country
Employees' Households 4,046 1,951
(Agricultural) (1,309) (1,528)
(Non-agricultural) (4,243) (2,238)
Non-Zmployees' Households 2,187 844
(Agricultural) ( 668) ( 562)
(Non-agricultural) (2,848) (2,027)
Source: Encuesta Especial sobre Ingresos a Traves de los Hogares:Ano 1970, Estadistica Panamena, Ano XXIV, Suplemento,1975, Cuadro 16, pp. 62-64.
-0
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Table A-2: DISTPIBUTION OF HOUSEHOLD INCOME, 1970, UNADJUSTED
Average TotalHousehold-- No. of HouseholdIncome Household Households Household Factor Income(Balboas) Size ('000) Income \(000 Balboas) ('000 Balboas)
144 3.97 28.5 3,848 4,131
300 4.91 28.5 7,772 8,538
513 4.67 28.5 13,287 14,611
831 4.73 28.5 20,519 23,690
1,216 4.91 28.5 32,102 34,669
1,645 4.91 28.5 43,299 46,874
2,183 4.86 28.5 58,218 62,205
3,008 5.20 28.5 79,891 85,739
4,521 5.34 28.5 118,537 128,860
11,056 5.41 28.5 300,993 315,085
TOTAL 4.89 285.3 678,466 724,402
Source: Direccion de Estadistica y Censo, Encuesta Especial sobre Ingresos aTraves de los Hogares; Ano 1970, Estadistica Panamena, Ano XXXIV,Suplement6,- 1975, pp. 66-67.
. .S ,.
Table A-3: DISTRI3UTION OF HOUSEHOLD IDCO`4E 5Y 'STROPOLITAN AREAS AN,D THE REST OF THE COU3NETRY,
197U, UnADJUISrED('000 Balboas)
Decile Group of Pouseholds
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th TOTAL
I. MetroDolitan-AreasNo. of Hoioseholds ('000) 4.9 5.9 7.8 11.8 13.7 17.2 18.4 20.4 21.5 24.0 145.6
TOTAL 139.7 5.15 1.55 0.301 178,832 216.5 826.0 10.1/- 1,759
/a The total ot 10.1 was distributed according to the distribution of total income earners for the first two income
classes in column 7.
/b Derived from Table 1 in the text.
Source: Encuesta Especial sobre Ingresos a Traves de los Ilogares: Ano 1970, Estadistica Panamena, Ano XXIV;Suplemento, 1975, pp. 68-69.
.
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Table A-5: ADJUSTMENT OF HOUSEHOLD INCOME FOR INCOMEEARNERS NOT COVERED IN METROPOLITAN AREAS
Aver. Adjustment toHousehold Non-Employee Income Non-Employee
Income Income(Balboa) Amount ('000 Balboas) % ('000 Balboas)
(1) (2) (3) (4=(3)x33,541)
147 491 0.4 134
310 991 0.9 302
527 1,810 1.6 537
826 2,574 2.2 738
1,224 4,181 3.6 1,207
1,650 3,872 3.4 1,140
2,169 6,133 5.4 1,811
3,013 8,598 7.5 2,516
4,542 15,897 13.9 4,662
11,379-- 69,949 61.1 20,494
TOTAL 114,496 100.0 33,541/a
/a Total personal income in the national accounts (713.8 million Balboas)minus total household income as derived from the unadjusted EEIHdata (678.5 million Balboas) minus the adjustment to the income ofnon-metropolitan households (1.76 million Balboas).
Source: Encuesta Especial Sobre Ingresos a Traves de los Hogares:Mo 1970, Estadistica Panamena, Ano =IV; SUDlemento, 1975, pp.66-7 7.
2.,,.
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Table A-6: DISTRIBUTION OF HOUSEHOLD INCOME, 1970, ADJUSTED,THE REST OF THE COUNTRY
Aver.Household Household Income
Income Households Amount(Balboas) No. % ('000 Balboas.)
180 23,700 17.0 4,270 2.2
337 22,600 16.2 7,605 4.0
507 20,700 14.8 10,505 5.5
835 16,700 11.9 13,948 7.2
1,209 14,800 10.6 17,896 9.3
1,623 11,400 8.2 18,502 9.6
2,185 10,200 7.3 22,290 11.6
2,959 8,200 5.9 24,265 12.6
4,458 7,000 5.0 31,203 16.2
9,541 4,400 3.1 41,982 21.8
TOTAL 139,700 100.0 192,466 100.0
Source: EEIH data, adjusted for under-reporting of income.
3
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Table A-7: DISTRIBUTION OF HOUSEHOLD INCOME, 1970, ADJUSTED,METROPOLITAN AREAS