Faculty of Economics, Universitas Negeri Jakarta, Jakarta, Indonesia
Faculty of Economics and Business, Universitas Diponegoro, Semarang, Indonesia
This study aims to explore welfare economic models that are viewed from the perspective of income inequality that still occurs in many countries today. Based on the theory of economic welfare, in this study, income inequality is influenced by the gap in the allocation/ownership of human and capital resources (L, K), especially in the difference of education level, labor skills mismatch and capital allocation gap. Income inequality and resource allocation gaps are measured by a specific index based on the gap formula. Based on panel data regression analysis with sample data in 33 Indonesian provinces (2007-2013), the estimation results show that the gap of education level, labor skills mismatch and credit allocation gap have proven to have a positive and significant effect on income inequality. This means that if the education gap, labor skills mismatch and credit allocation gap increase, then income inequality also increases. By knowing the magnitude of the inequality of resource allocation, policy-makers can reduce problems through reallocation and redistribution policies.