Public Disclosure Authorized DRAFT EPD INCOME DISTRIBUTION PROJECT DATA ON INCOME DISTRIBUTION IN PANAMA. Public Disclosure Authorized.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized EPD INCOME DISTRIBUTION PROJECT DATA ON INCOME DISTRIBUTION IN PANAMA Jong-goo Park Division Working Paper No March 1981 Economic and Social Data Division Economic Analysis and Projections Department Development Policy Staff The World Bank DRAFT Division Working Papers report on work in progress and are circulated for Bank staff use to stimulate discussion and comment. The views and interpretations in a Working Paper are those of the author and may not be attributed to the World Bank or its affiliated organizations.

2 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 Division Economic Analysis and Projections Department - March 1981

3 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 REFERENCES APPENDIX TABLES... 13

4 DATA ON INCOME DISTRIBUTION IN PANAMA I. Introduction 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 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 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 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 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 household income survey in Panama" to provide data for the estimation of the country's income distribution, and Cb) the Bank mission's estimate of income distribution was "unsatisfactory." (See World Bank Report No. 275-PAN, Vol. II, November 13, 1973, pp ).

5 -2- 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 metropolitan areas - and 2,811 from the rest of the country. The sample households 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 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 Cruz de Chinana) in the Province ofpanama and the districts of Colon, Charges, Portobelo and Santa Isabel in the Province of Colon. The population in the metropolican areas accounted for 41% of the country's population in J

6 -3- 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, The reference period for information on income was the calendar year 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 during part of calendar year 1970 were covered by the survey.

7 -4- 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 underrepresented 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 were selected from a special listing for "very high income" households. /2 Non-employees refer to employers and the self-employed.

8 Table 1: EMPLOYMENT BY SECTOR AND AREA, 1970 ('000) Metropolitan Areas Rest of the Country Employees Non-employees/- Employees Non-employees/- lb Non 7 l Non 7 l Non 7 l Non-/ Ag. Ag.-b All Ag./- Ag.- All Ag.1- Ag. All Ag.- Agr.- All (A) EEIH /e (B) Labor Stat./ A/B /a Includes the self-employed and employers. /b Agricultural sector. /c Non-Agricultural sector. /d Encuesta Especial sobre Ingresos a Traves de Los Hogares: Ano 1970, Estadistica Panamena, ANO XXXIV, Suplemento, 1975, Cuadro 1, pp /e Estadisticas del Trabajo, Ano 1970, Serie "O", Contraloria General de Republica, Direccion de Estadistica y'bcenso, Cuadro 1z, p

9 c. Under-Reporting of Income 14. The survey report shows that total household factor income amounted to million Balboas for an estimated population of 1.4 million in 1970./ This is 95% of the comparable aggregate income of million Balboas derived from the national accounts (Table 2). This suggests that the under-reporting of income in the survey was not a serious problem. 15. When we examined the survey data on the average income of employee and non-employee households, we found that the average income of employee households was significantly higher than that of non-employee households. This was true in both the metropolitan and non-metropolitan areas and in both the agricultural and non-agricultural sectors. -6- (Appendix Table A-1). 16. Panama's agricultural sector is characterized by the coexistence of primitive farming of the slash-and-burn type arid well-developed commercial farming. Over 40% of all farm families are subsistence farmers. On the other hand, workers at commercial farms, who account for about half of all agricultural wage workers, receive relatively high wages. For example, in 1968 about 40% of- the rural households had an annual average income below $500, while workers on banana plantations had an annual average income of $1, 6 00.L2 This largely explains the relatively higher average income of employee households in.the agricultural sector. /1 This population estimate is the same as the 1970 census figure. See Appendix, Tables A-2 and A-3, for the original survey data. /2 Report on the Economy of Panama, V61. I, World Bank Report No. 275-PAN, November 13, 1973, p. 15.

10 -7- Table 2: PERSONAL INCOME IN THE NATIONAL ACCOUNTS, 1970 (million Balboas) 1. National income (at factor cost) Corporate savings after taxes Direct taxes on private corporations Government income from property and corporations (less interest on public debt) Personal factor income ( ) Wages, salaries & prw-essional earnings/a Other family and non-corporate income 36.4 /a Includes income of unincorporated firms. Source: Controller General, the Government of Panama.

11 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 nonemployee (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 country 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 distribution 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).

12 Regarding the non-employee income earners in the metropo 1 itan 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 metropolitan 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 distribution of income (Table 42. Relevant data which can explein the differences between the latter two estimates are not available (see para. 1). I.',,

13 Table 3: INCOME DISTRIBUTION IN PANAMA, 1970 Cumulative % of Cumulative % o5 Households Household Income Lb 77.9/b T Gini Coefficient /a Household income before payment of direct tax and social security contribution. /b Derived through linear interpolation. 4r

14 Table 4: INCOME INEQUALITY MEASURES BASED ON DIFFERENT ESTIMATES, 1970 Data Source Share (%) in Total Household Income Lowest Lowest Highest Highest Gini 20% of 40% of 20% of 5%O of Coefficient Households Households Households Households EEIH (Adjusted) EEIH (Unadjusted) Social Indicators Sheet V. Concluding Remarks 23. We estimated the distribution of household income in Panama for 1970, using data from the country t s first national household survey. We found that the inequality 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. households may be less reliable. However, the data on the income of non-employee 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

15 -12- REFERENCES 1. Direccion de Estadistica y Censo,-Encuesta Especial Sobre Ingresos a Traves de los Hogares: Ano 1970, Estadistica Panamena Ano XXXIV, Suplemento, , Estadistica Panamena, Series 0: Estadisticas del Trabajo (Encuesta de Mano de Obra), Ano 1970, McLure, Jr., C.E., "The Distribution of Income and Tax Incidence in Panama, 1969," Paper No. 36, Program of Development Studies, Rice University, Houston, Texas, Winter World Bank,-Report on the Economy of Panama, Vols. I, II, III and IV, Report No. 275-PAN, November 13, , Social Indicators Data Sheets, August 1979.

16 -13- APPENDIX TABLES Table A-1: AVERAGE ANNUAL INCOME OF EMPLOYEES' AND NON-EMPLOYEES t HOUSEHOLDS, 1970 (Balboas) Metropolitan Areas Rest of the Country Employees' Households 4,046 1,951 (Agricultural) (1,309) (1,528) (Non-agricultural) (4,243) (2,238) Non-Zmployees' Households 2, (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

17 -14- Table A-2: DISTPIBUTION OF HOUSEHOLD INCOME, 1970, UNADJUSTED Average Total Household-- No. of Household Income Household Households Household Factor Income (Balboas) Size ('000) Income \(000 Balboas) ('000 Balboas) ,848 4, ,772 8, ,287 14, ,519 23,690 1, ,102 34,669 1, ,299 46,874 2, ,218 62,205 3, ,891 85,739 4, , ,860 11, , ,085 TOTAL , ,402 Source: Direccion de Estadistica y Censo, Encuesta Especial sobre Ingresos a Traves de los Hogares; Ano 1970, Estadistica Panamena, Ano XXXIV, Suplement6,- 1975, pp S,.

18 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-Areas I-. No. of Hoioseholds ('000) Household Size Larners per H2ousehold Compensation cf Employees ,643 5,076 11,014 21,953 30,826 49,036 74,1l4 190, ,138 in Cash ,604 4,849 10,417 20,743 29,150 46,347 70, , ,602 :n Kind L ,036 1,462 ~mlover 's Contrib5ution to Social Secnrit o 3 ' ,195 l,s11 2,523 3,865 11,066 21,074 E-plover income ,780 2,514 4,164 3,739 5,0u8 8,528 15,549 40,388 84,144 1; i ,652 3,112 2,472 3,900 5,615 9,178 18,3C1 45,7i58 'K Kind ,052 1,267 2,108 2,914 6,371' 22, A7 38,386 e er; -.come ,561 30,352 -ransrer Incosme ,092 1,579 2,547 2,956 3,839 7,656 12,255 34,061 TOTAL IJCOMM 721 1,831 4,107 9,742 16,774 28,372 39,915 61,473 97, , ,695 Rest of t;ie Countr; No. of Households ('000) , Household Size b Earners per 'ousehold ? Compensation of Employees 286 1,288 3,324 6,4U1 11,122 11,575 13,834 16,232 20,426 23, ,321 in Cash 270 1,227 3,209 6,047 10, ,931 15,114 19,101 22, ,487 In Kind , plover' s Contribution to Social Security ,197 1,439 5,493 -:--=Ier income 2,92' 4,994 6,437 6,365 5,770 5,721 7,226 5,638 7,652 12,604' 65, Cash 801 1,645 2,983 3,264 3,363 3,133 4,485 3,114 4,361 10,'33 37,282 n.ikin 2,121 3,349 3,4-4 3,101 2,407 2,588 2,741 2,524 3,291 2,471 26, l Property Income ,709 5,1E2 Transfer income , ,027 1,030 2,009 2,667 1,836 11,875 TOTAL INCOE 3,410 6,706 10,505 13,948 17,896 18,502 22,290 24,265 31,203 41, ,707 Source: Encuesta Especial sobre Ingresos a Traves de lqs Fogares; Ano l97oq Estadistica Panamena, Ano.EIV; Suplemento, 1975, pp

19 Table A-4: ADJUSTMENT OF HOUSEHOLD INCOME FOR INCOME EARNERS NOT COVERED IN THE REST OF THE COUNTRY Total Total Factor Adjustments Aver. Income Household No. of Income No. of Household No. of Members Earners Earner Factor Income Per Income Farmer Income Income Households per per Member Income Earners Income Earners ('000 Balboas) (Balboas) ('000) Households Households Ratio ('000) ('000) Earner ('0O? 1 (2) (3) (4) (5=4t3) (6) (7=2x4) (8=6+7) (9) - (10=8x9) , i , , ' , , , , , C 2,185..., , , , , , , , , , , , TOTAL , /- 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

20 -17- Table A-5: ADJUSTMENT OF HOUSEHOLD INCOME FOR INCOME EARNERS NOT COVERED IN METROPOLITAN AREAS Aver. Adjustment to Household Non-Employee Income Non-Employee Income Income (Balboa) Amount ('000 Balboas) % ('000 Balboas) (1) (2) (3) (4=(3)x33,541) , , ,224 4, ,207 1,650 3, ,140 2,169 6, ,811 3,013 8, ,516 4,542 15, ,662 11, , ,494 TOTAL 114, ,541/a /a Total personal income in the national accounts (713.8 million Balboas) minus total household income as derived from the unadjusted EEIH data (678.5 million Balboas) minus the adjustment to the income of non-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 ,,.

21 -18- Table A-6: DISTRIBUTION OF HOUSEHOLD INCOME, THE REST OF THE COUNTRY 1970, ADJUSTED, Aver. Household Household Income Income Households Amount (Balboas) No. % ('000 Balboas.) , , , , , , , , ,209 14, , ,623 11, , ,185 10, , ,959 8, , ,458 7, , ,541 4, , TOTAL 139, , Source: EEIH data, adjusted for under-reporting of income. 3

22 -19- Table A-7: DISTRIBUTION OF HOUSEHOLD INCOME, 1970, ADJUSTED, METROPOLITAN AREAS Aver. Household Households Household Income Income (Balboas) No. - Amount ('000 Balboas) % 174 4, , , , , , , ,312 13, , ,716 17, , ,268 18, , ,137 20, , ,759, 21, , ,233-24, , TOTAL 145, , Source: EEIH data, adjusted for under-reporting of income. o,.

23 -20- Table A-8: DISTRIBUTION OF HOUSEHOLD INCOME, 1970, ADJUSTED/-a Average Household Households Household Income Income -.Amount (Balboas) No. % ('000 Balboas) % , , , , , , , , ,259 28, , ,685 28, , ,246 28, , ,097 28, , ,685 28, , ,775 28, , TOTAL 285, , /a Derived from Tables A-6 and A S.

24 -21- Table A-9: DISTRIBUTION OF HOUSEHOLD INCOME BY DECILE HOUSEHOLD GROUP, REST OF THE COUNTRY, 1970 Cumulative % Cumulative % of /a of Households Household Income , (95) (72.0) Gini Coefficient /a Derived from Table A-6 'by linear interpolation between two adjacent income classes. j,s,.

25 -22- Iable A-10: DISTRIBUTION OF HOUSEHOLD INCOME BY DECILE HOUSEHOLD GROUP, M4ETROPOLITAN AREAS, 1970 Cumulative % of Households (95) 100 Cumulative % of Household Income a (84.3) 100O0 Gini Coefficient /a Derived from Table A-7 by linear interpolation between two adjacent income classes..s --

26 Table A-li: DISTRIBUTION OF PER-CAPITA INCOIE BY HOUSEHOLD MEaBERS, 1970, UNADJUSTED /a Average Household Members Household Income per-capita Income Amount (Balboas) No ('000) % (1000 Balboas) % , , l2 19, , , , , , , , , , TOTAL 1, , /a Derived from Encuesta Especial Sobre Ingresos a Traves de Los Hogares: Ano 1970, Estadistica Panamena, Ano XXXIV, Suplemento, Cuadro 19, pp