Economic Factors Affecting Economic Inequality Within the Economy: A Case of Pakistan

Abstract

It is now common knowledge that rising inequality has serious consequences for economic growth and stability. As well as potentially leading to suboptimal use of human resources, political and economic instability, and an increased risk of disaster. Income inequality is also associated with lower levels of social cohesion; therefore, it is important to identify the causes of the economic inequality that exists in the country. So, looking at the economy of Pakistan as a case, this study is set out to identify the factors that help explain income inequality. It was decided to use the following categories of data as independent variables: financial development; FDI; GDP growth; remittances; inflation; poverty; and unemployment. Researcher compiled the study's statistical information from a variety of online sources. This research used both the statistical software EViews and the Microsoft Office suite of products to carry out the various processes and conduct the empirical analysis. In addition, we used the autoregressive distributed lag model (ARDL). Long-term co-integration among the dataset's variables was also obtained without losing any of the data's short-term context. For this study, we constructed an unbalanced panel data set and used annual data from 2006 to 2020. To begin, we used matrix correlation coefficients to make some statistical estimates. ARDL model is also used to double-check the direction of the ADF unit root test's results. When looking at the ARDL's estimates for the future, it's clear that issues like unemployment, inflation, and poverty all contribute to a widening income gap. On the other hand, three factors have been identified as driving a reduction in income inequality: economic growth, remittances, and financial development. However, there is little proof that foreign direct investment improves a country's economy.