Issue of Income Inequality under the perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan

This study has investigated the impact of macroeconomic instability on income inequality in Pakistan over the period of 1980 to 2015. A comprehensive macroeconomic instability index has been constructed by incorporating inflation rate, unemployment rate, trade deficit and budget deficit. Stationarity of data is checked with the help of Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Dickey-Fuller Generalized Least Squares (DF-GLS) unit root tests. Autoregressive Distributed Lag (ARDL) model has been used for examining the co-integration among the variables of the model and Vector Error-Correction model has been used for short run dynamics of the model. The empirical results of the study confirm the existence of co-integration between macroeconomic instability and income inequality in Pakistan. The results of the study show that macroeconomic instability has deep rooted impact on income inequality in case of Pakistan. Hence, for achieving desired level of income distribution, Pakistan should make its macroeconomic environment stable.