Functional income distribution in Pakistan: Co‐integration and vector error correction model analysis

Abstract

AbstractThis research aims to explore the long‐ and short‐run impact of the functional income distribution variables of Pakistan. Three main variables were analysed, real wage, non‐agricultural wage and operating surplus (OS), as all three are the pillars of the functional income distribution. Annual data were collected from 1986 to 2019 from the State Bank of Pakistan, and time series analysis co‐integration and vector error correlation model have been applied. We found that only two variables, real wage and non‐agricultural wage, are affected in the long run while the OS is not affected in the long run. There is no short‐term effect of any variable except real wage and non‐agricultural wage. It is recommended that the government should invest in the human capital of both agriculture and industrial sectors to overcome the problem of unequal functional income distribution in Pakistan.