Investment in Education and Income Inequality: Testing Inverted U-Shaped Hypothesis for Pakistan

Abstract

The main objective of this study is to test the existence of inverted U-shaped relationship between investment in education and income inequality in Pakistan using annual time series data from 1973 to 2015. The study utilized vector error correction modeling framework to examine long run effect of investment in education on income inequality. The empirical results show that investment in education is one of the most important factors affecting the income inequality in Pakistan. Moreover, the study finds a non-linear relationship between investment in education and income inequality suggesting the existence of inverted U-shaped relationship between educational expenditure and income inequality. There seems to be two types of processes at work, namely composition effect and compression effect responsible for this type of relationship.