Determinants of income inequality among the earners in Pakistan

Abstract

Growth policy adopted to decrease poverty in Pakistan has always been characterized by high levels of inequality since growth has never been pro-poor. The existence of high levels of inequality during the periods of high growth not only decreased the growth but also reduced the poverty decreasing effect of the growth whereas the periods of low growth were marked by undue increases in poverty due to inequality. Since, inequalities in the income are the main hurdle to the effective poverty alleviation. Understanding the structure of income inequality is important to reduce poverty. The study accomplishes this task by examining the factors that determine the level of income inequality in Pakistan and knowing the drivers of the changes in the income distribution by utilizing Household Integrated Economic Survey (HIES) for the year 2005-06 and 2010-11.This is achieved by estimating the level of income inequality among earners using the Gini index approach and reestimating the determinants of earnings using a standard augmented Mincerian model. Further, the determinants of inequality and its change are estimated using the regression based decomposition methodology proposed by Fields (2003). The study finds a decline in the Gini index from 0.52 in 2005 to 0.44 in 2010. The results show that after age, the share of gender in inequality (Gini index) is highest for both the study periods, followed by education, and professional categories of occupation. The results further suggest that the decline in the Gini index from 2005 to 2010 is mainly attributed to the policies adopted by the government under the Poverty Reduction Strategy Program (PRSPII). The study predicts that continuation of the well-directed policies is expected to positively contribute to the decline in inequalities further.