Abstract:
The main objective of this study was to identify the factors that cause income inequalities
among individuals in Ethiopia during the period from 1991 to 2022 based on secondary
data. To meet this goal, the study used a quantitative research approach. The data for this
study like Gini coefficients were collected from World Income Inequality Database while
the rest variables were collected from Ministry of Finance and Economic Corporation, and
National Bank of Ethiopia. The study employed the Auto Regressive Distributed Lag
Model to examine the long-run and short-run relationship between income inequality
and explanatory variables. The results of Augmented Dickey Fuller for unit root test
reveal that all variables are stationary after the first difference. The empirical results
of long run showed that education and foreign direct investment were had negative
relationship and significant effect on income inequalities while inflation rate, real interest
rate, trade openness and population growth rate had positive effect. The results of short
run stated that the government expenditure and trade openness had negative relationship
and significant effect on income inequalities. Real interest rate, population growth rate,
unemployment rate and inflation rate were significant effect and positive relationship with
income inequalities. Income inequality and inflation have positive relationship over the
long and short terms. Rising inflation lowers workers' real pay, especially for those with
lower incomes. This situation decreases lower workers standard of living and widens the
gap between the wealthy and the poor. Therefore, the National Bank of Ethiopia should
pursue the stable macroeconomic policies that will lower inflation or the government of
Ethiopia should be enhanced the wage of low income earners. When the level of
unemployment rate rises, the income gap between employment and unemployment was
widen. Thus, the government of Ethiopia should facilitate access to employment by
developing policies that lessen labor market imperfections and institutional failures. The
findings indicate that education has a substantial long-term impact on reducing income
inequality, thus, policymakers and the government should work to increase access to
education in order to boost individual productivity.
