Determinants of Income Inequality among the Earners in Pakistan

Type Working Paper
Title Determinants of Income Inequality among the Earners in Pakistan
Publication (Day/Month/Year) 2016
URL 06-16.pdf
Growth strategy adopted in Pakistan has failed to reduce poverty for two reasons. First, it has not
been pro-poor, and second, it exacerbated the income inequality situation in the country that has
further compounded the poverty situation. The historical data confirms that during high periods of
growth, the emergence of high levels of inequality not only decreased the growth momentum but
also reduced the poverty-decreasing effect of the growth. On the other hand, periods of low growth
were marked by undue increases in poverty due to inequality. Since, inequality in income is the main
hurdle to alleviate poverty effectively, understanding the structure of income inequality is important
to undertake poverty reduction program. The present 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 was achieved by estimating the level of income inequality among
earners using the Gini index approach and re-estimating the determinants of earnings using the
standard augmented Mincerian model. Further, the determinants of inequality and its change were
estimated through the regression-based decomposition methodology proposed by Fields (2003). The
study has found a gradual decline in the Gini index from 0.52 in 2005 to 0.44 in 2010 due to the
policies adopted by the government under the Poverty Reduction Strategy Program (PRSP-II). The
results have further shown that after age, the share of gender in inequality (Gini index) was highest
for both the study periods, followed by education, and professional categories of occupation. The
study predicts that continuation of the well-directed policies would positively contribute to the
decline in inequalities further.

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