Changes in income inequality and its determinants in Pakistan: A disaggregated analysis

Abstract

Abstract Investigating the determinants of inequality is crucial for understanding the root causes of unequal distribution of resources and opportunities in society. It can help identify the factors that contribute to inequality, such as world or market forces, social norms, ownership of real and human capital, and the role of government. By understanding these factors, we can develop policies and interventions that address the root causes of inequality and promote greater equality and social justice. With respect to Pakistan, the available literature has estimated the effects of household’s characteristics and other determinants on income inequality at aggregate level in a single period of time. However, the policymakers and economists suggested that household characteristics must be analyzed at disaggregated level incorporating time variations to develop a more impactful policy framework. Without it, we will continue to have limited understanding of the peculiarities of family behavior and how they react to different policy initiatives. In this context, the current study assesses the determinants of income inequality over various years and change in income inequality over various years for urban and rural areas of Pakistan. The data has been taken from HIES 2001-02, 2007-08, 2013-14 and 2018-19 respectively. Fields decomposition analysis has been used to measure the changes in income inequality over the years in Pakistan for urban and rural areas. The results from the study revealed that gender, education, assets holding, occupation, and paid employment have a positive contribution to increasing income inequality. Whereas, social safety nets, access to utilities, and access to affordable housing have a negative contribution to income inequality. The results indicated clearly that policies have failed to provide social justice to the households due to a lack of opportunities and unequal distribution of income. Therefore, the fruits of high-income growth have been nullified due to the prevalence of income inequality among households.