Does Non-farm Income Improve or Worsen Income Inequality? Evidence from Rural Ghana

Abstract

This paper uses nationally representative household survey data of 2006 to examine the effect of non-farm income on income inequality in rural Ghana. Employing the Gini-decomposition technique, results indicate that aggregate non-farm income increased income inequality among rural households in Ghana. In terms of its components, while non-farm self-employment income reduced income inequality, non-farm wage income increased income inequality. A factor-decomposition of inequality revealed that education is the single most important variable contributing to the inequality-increasing nature of non-farm income. The effect of education on inequality is more pronounced for non-farm wage income. The policy implication is for a narrowing of education inequality among rural households in Ghana to create greater access to non-farm employment to reduce rural income inequality and poverty.