Determining the Role of Major Macroeconomic Indicators in Widening Income Gap in Pakistan

Abstract

The impact of rising inequality on economic growth and stability is widely recognized, as it can lead 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 crucial to identify the causes of economic inequality in a country. To this end, a study was conducted on Pakistan's economy to identify the factors behind income inequality. The study used financial development, FDI, GDP growth, remittances, inflation, poverty, and unemployment as independent variables and employed a deductive approach with quantitative research methods. The study utilized the statistical software EViews and the Microsoft Office suite of products to conduct various processes and empirical analyses. The autoregressive distributed lag model (ARDL) was used to obtain long-term co-integration among the dataset's variables without losing the data's short-term context. The study found that unemployment, inflation, and poverty contribute to a widening income gap, while economic growth, remittances, and financial development are driving factors behind a reduction in income inequality. However, there is little proof that foreign direct investment improves a country's economy.