Determinants Of Income Inequality In Ethiopia: Time Series Analysis

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.