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Does Expanding Higher Education Reduce Income

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 Studies in Higher Education

ISSN: 0307-5079 (Print) 1470-174X (Online) Journal homepage: http://www.tandfonline.com/loi/cshe20

Does expanding higher education reduce income

inequality in emerging economy? Evidence from
Pakistan

Wasim Qazi, Syed Ali Raza, Syed Tehseen Jawaid & Mohd Zaini Abd Karim

To cite this article: Wasim Qazi, Syed Ali Raza, Syed Tehseen Jawaid & Mohd Zaini Abd Karim
(2016): Does expanding higher education reduce income inequality in emerging economy?
Evidence from Pakistan, Studies in Higher Education, DOI: 10.1080/03075079.2016.1172305

To link to this article: http://dx.doi.org/10.1080/03075079.2016.1172305

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 Studies in Higher Education, 2016
http://dx.doi.org/10.1080/03075079.2016.1172305

Does expanding higher education reduce income inequality in

emerging economy? Evidence from Pakistan
Wasim Qazia, Syed Ali Razab,c*, Syed Tehseen Jawaidd and Mohd Zaini
Abd Karimb
a
Department of Education & Learning Sciences, IQRA University, Karachi 75300, Pakistan;
b
Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, UUM
Sintok, Kedah Darul Aman 06010, Malaysia; cDepartment of Management Sciences, IQRA
University, Karachi 75300, Pakistan; dApplied Economics Research Centre, University of
Karachi, Karachi, Pakistan
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This study investigates the impact of development in the higher education sector,
on the Income Inequality in Pakistan, by using the annual time series data from
1973 to 2012. The autoregressive distributed lag bound testing co-integration
approach confirms the existence of long-run relationship between higher
education and income inequality. Results indicate that higher education has a
negative and significant relationship with the income inequality in the long run,
while a negative but insignificant effect is found in the short run. Results of
cumulative sum (CUSUM) and CUSUM of square test suggest that there is no
structural instability in the residuals of equation of income inequality. Results of
causality analyses confirm the unidirectional causal relationship between higher
education development and income inequality in Pakistan, which runs from the
higher education development to the income inequality. The findings of this
study suggest that development in the higher education sector would be a
significant policy option to control the income inequality and should be
considered a means to improve the income distribution in Pakistan.
Keywords: higher education; income inequality; economic growth; time series
analysis
JEL Classification: F43; I23; D30; C23

1. Introduction
For the past two decades, increasing inequalities within and between countries and
expenditure on development of human capital across the world have been two
serious issues for the researchers and economists. Unfortunately, only a few studies
have been conducted to analyze the interaction of these two issues. There is lack of
available literature on the relationship of higher education and income inequality.
Researchers and economists have been long debating the consequences of invest-
ment in human capital development on the growth and development of any country.
The development and accumulation of human capital are a main substance of growth
of any economy. The differences in the human capital of different nations cause the
difference between their living standards (Lucas 1993). The fortune of economic

*Corresponding author. Email: syed_aliraza@hotmail.com

© 2016 Society for Research into Higher Education

 2 W. Qazi et al.

growth of any country is mainly based on its human or intellectual capital. The quality
and extent of education are very important for the socioeconomic development of any
society.
The current era is one where intellectual capital becomes a symbol of the rapid growth
of any economy and higher education is becoming a tool to improve the human or intel-
lectual capital through producing critical thinkers, researchers, scholars, innovators and
responsible citizens in society. Higher education also provides the opportunities to main-
tain social mobility and high standards of living. Consequently, the requirement of higher
education is more important for less-developed or developing countries like Pakistan if
they are to achieve rapid and sustainable economic growth in the future.
One of the major objectives of any welfare state is to redistribute the government
revenues in public to improve the distribution of wealth in the country. A government
has to incur different social expenditures to improve the living standard and reduce the
income inequalities within the country. The size of the budget is the main hurdle in the
way of distributing the government revenue in the social activities. The budget plays a
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conflicting role to make trade-offs between different types of expenditures. Therefore,

the higher non-development expenditures result in less funds being available for edu-
cation, health and other social expenditures, all of which help to improve income
inequality (Gunluk-Senesen 2002; Elveren 2012).
Many researchers have examined the relationship between income inequality and
education. Some studies show that an inverse relationship exists between the level of
schooling and income inequality in the country. An increase in the average level of
schooling of a population decreases the income inequality (Park 1996; De Gregorio
and Lee 2002). However, some studies also reported no strong association between
education and income inequality (Chiswick 1974; Ram 1984, 1989).
Education has a significant positive relationship with individual income and the
nation’s income. The low earners have less income so they cannot access quality education,
similarly, the less-educated people do not earn a sufficient income. In other words, an
income inequality results in educational inequality and vice versa (Chani et al. 2014).
The developed nations spend more money on improving their education system to
increase their human capital. In developing economies, human capital plays an impor-
tant role to enhance the economic growth and to reduce income inequalities. Pakistan is
among one of the developing countries which faces income inequality as well as low
literacy rate. Pakistan economy has high income inequality and it was at its worst
during the 1980s and early 1990s (Shahbaz and Islam 2011).
Pakistan has a highly unequal income distribution as compared with the other devel-
oping economies. The trend of income inequality shows mixed results in Pakistan. In
the 1970s, the average annual value of Gini coefficient (a renowned parameter to esti-
mate the income inequality) was 0.359. In the 1980s, the income inequality in Pakistan
remained steady and increased by only 0.005, the average annual value of Gini coeffi-
cient in the 1980s was 0.364. In the 1990s, the income inequality in Pakistan sharply
increased and average value of Gini coefficient became 0.403. The year of 1992 had
the highest value of Gini coefficient, that is, of 0.410. In the decade of 2000s, the pos-
ition of income inequality in Pakistan improved and the value of Gini coefficient
decreased by a large margin, that is, 25%. The average annual value of Gini coefficient
was 0.300 in the 2000s. However, the income inequality in Pakistan has increased in the
four years from 2009 to 2012 with a Gini coefficient value of 0.321, 0.328, 0.332 and
0.345, respectively.
 Studies in Higher Education 3

In Pakistan, the education sector has persistently suffered from low investment by the
government for the last six decades. The government spending on education in 2012 was
just 2% of gross domestic product (GDP) of the country. According to United Nations
Development Program (UNDP), Pakistan, is 1 of the 12 countries in the world, which
spend less than 2% of GDP on education.1 The non-availability of adequate funds over
the past years was one of the reasons of unsuccessful education programs. It is a fact
that Pakistan is clearly deficient in implementing policies to improve the education system.
Furthermore, Pakistan has not shown improvement in the field of education and
according to the human development report, in terms of education spending it is ranked
145th out of the 160 countries compared (Munir, Mehmood, and Zeb 2015). The literacy
rate in Pakistan is only 58%, which means that 42% in the nation are not able to read and
write. Budget allocation is another constraint as the government spent only 2.0% of GDP
in the last decade and a large amount of budget was spent on recurrent heads, leaving an
insufficient amount to be spent on curriculum development, teacher training, supervision
of education or improving the school buildings (Qazi, Raza, and Jawaid 2014).
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Until 2002, Pakistani universities were granted formal recognition by the University
Grant Commission (UGC). In 2002, the government introduced a new ordinance called
the Higher Education Commission Ordinance, and since then, the Higher Education
Commission (HEC) of Pakistan has been responsible for all policies concerning
higher education, assurance of quality in education, recognition of degrees, uplifting
the standards of existing institutions and developments of new institutions in Pakistan.
In the last 10 years, HEC has performed a leading role toward building a knowledge-
based economy in Pakistan by producing more than 3000 PhD scholars.
The causal relationship between higher education development and income inequal-
ity is an important issue in an emerging economy. The direction of causality is not
obvious either from theory or past empirical results. If the causal relationship runs
from income inequality to higher education or there is feedback (bi-directional)
relationship exists between them, then income inequality will affect the higher edu-
cation development. Differently, if the causality goes from higher education develop-
ment to income inequality then higher education considers as an important tool to
control income inequality. The main objective of this study is to examine the relation-
ship between higher education and income inequality in Pakistan. This paper makes a
unique contribution to the literature with reference to Pakistan. This study is a pioneer-
ing attempt to investigate the role of higher education to reduce the income inequality in
Pakistan by using long annual time series data from 1973 to 2012 and by applying rig-
orous econometric techniques.
The paper is organized as follows: subsequent to the introduction, Section 2 reviews
some selected studies, Section 3 discusses the empirical strategy, Section 4 shows esti-
mations and results, Section 5 shows the results of stability analyses through cumulat-
ive sum and the cumulative sum of square estimations, Section 6 discusses the results of
causal relationship between higher education and income inequality and the final
section concludes the study and provides some policy implications.

2. Literature review
2.1. Theoretical background
The income distribution of the economy is related to many factors, in particular the
income distribution is related to physical distribution (land, labor and capital) and
 4 W. Qazi et al.

human distribution (education and skills). In countries, where income distribution of

these two is equal, it is more probable that the income gained from production
process will be equally distributed (Carnoy, Loyalka, and Androuschak 2012).
In theory, the income distribution of employment or labor-intensive employment is
interlinked with the distribution of the education level within the labor market. Pre-
viously Kuznets (1955) and Adelman and Morris (1973) gave out a theory on
income distribution called as ‘Inverted-U’ theory. According to Kuznets (1955), in
lower income economies, income distribution is equal because most of the workers
are engaged in agriculture due to low educational level. Incomes are concentrated at
low levels and this leads to the equal income distribution. As the education level
starts increasing, the income distribution becomes unequal because the economies
start moving toward urbanization. As the education level reaches its highest level,
the income distribution becomes equal again. Adelman and Morris (1973) by using
the empirical evidences confirmed the above results. They reported that countries
with lower GDP per capita have low-income equalities compared to the countries
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that have a medium level of GDP per capita. Moreover, countries with high level of
the GDP per capita also have lower income inequalities when compared to countries
that have a medium level of GDP per capita.
However, the support of Adelman and Morris (1973) for ‘Invented-U’ theory does
not apply to all countries. In some economies the structural transformation or the
change in the education distribution within the labor market does not create a significant
effect on income distribution. For instance, South Korea was a rural country in the
1950s and changed into a highly industrialized country with high income and education
level in the 1990s, yet, a little change in income distribution was observed during that
year. Moreover, the change in income distribution is because of the change in the
income policies, instead of due to changes in the education distribution in the labor
force or alteration in the production process (Nam 1994).
USA is another example, which contradicts the argument proposed by Kuznets
(1955) and Adelman and Morris (1973). In the USA, income distribution was equal
during the years 1930s–1940s.The income distribution has remained at the same
level since then, even the education distribution came closer to equaling it in early
1970. In the mid-1970s, the income distribution became unequal, and yet, the education
level is quite equal. Hence, in both countries, Korea and USA, the equal income distri-
bution is not linked to the education distribution (Carnoy, Loyalka, and Androuschak
2012).
Since the 1970s, the economists have given different views and reasons on the
income inequality in both developed and developing countries. One group of econom-
ists supports that technological advancement required technical skills which can be
developed by higher education. This need for technical skills has increased exponen-
tially in past generations which escalates the level of unequal income distribution
(Murphy and Welch 1989; Katz 1999). Another economist supports that income pol-
icies cause income inequality in the countries, and these polices can be related to mon-
etary policies, minimum wage policies, immigration policies, trade liberation polices,
etc. All of these policies reduce the low-wage worker’s earnings. Fiscal policies also
change the income distribution (OECD 2007).
To summarize, the three main reasons which change the economy income distri-
bution over time include education expansion, technological change and income pol-
icies. Education expansion equalizes the education distribution which increases
chances of equal income distribution. Technological change increases the need for
 Studies in Higher Education 5

higher education which increases the unequal distribution of wealth. Income policies
can also change the education level and plays a significant role in changing the income dis-
tribution within the country and it is the most important factor compared to educational
expansion or technological change (Carnoy, Loyalka, and Androuschak 2012).

2.2. Empirical evidence

Income and schooling inequality have positive associations with each other in the USA,
as claimed by Becker and Chiswick (1966). On the other hand, Chiswick (1974) found
an insignificant relationship between education inequality and Gini coefficient. Mohan
and Sabot (1988) highlight that expansion in education will reduce income inequality.
They explain that increase in supply of skilled labor in the market will build stress on
wage differential.
Adelman and Taft-Morris (1973), Ahluwalia (1976), Slama (1978) and Papanek
and Kyn (1986) state that education is associated with equality of income. Fields
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(1980) reports that there is no way to diminish income inequality. In fact, a number
of countries use additional resources for public education. Jimenez (1986) argues
that public spending on education is not beneficial for the poor at all. Ram (1990)
reviews existing literature (theoretical and empirical) and concludes that there is no
strong relationship between increasing education and reducing income inequality.
Schultz (1963) reported that human capital is one way to decrease income inequality
by providing education to enhance capabilities. Glomm and Ravikumar (1992) built a
model where public and private educational systems could be chosen by agents. While
under the private education system the effect on income inequality depends on the par-
ameters. On the other hand, income inequality definitely decreases under the public
education system. Eckstein and Zilcha (1994) and Zhang (1996) built models where
persistent support for public education helps to reduce income inequality over time.
Partridge, Partridge, and Rickman (1998) reported that increase in average level of edu-
cation ensures higher equality in the USA. Doessel and Valadkhani (1998) found that
total government expenditure played a significant role in reducing income inequality; in
contrast, education expenditure had no significant effect on it.
Conversely, Sylwester (2000) developed a model where the level of income
inequality decreased with the help of public education given that enough resources
are available for agents to attend the school instead of working on earning money. If
the agents are poor and could not attend schools subsequently, supporting public edu-
cation would be the reason of the extra skewed income distribution. Although taxes are
paid by the poor, they do not get the benefit of the public education system. Sylwester
(2002) posited those countries that have higher public expenditure on education face
less-income inequality. However, it is highlighted that education expenditure has a
marginal effect on Gini coefficient.
Rodrıguez-Pose and Tselios (2009) identified the determinants of income inequality
in the European Union (EU) region by employing panel data of 102 regions of the Euro-
pean Community Household from 1995 to 2000. Results suggest that income inequality
is positively associated with inequality in education attainment. Duman (2008) argued
that because of increasing private spending on primary and secondary education and
limited public spending, the gap among socioeconomic groups will not be significantly
reduced. Mastromarco, Peragine, and Serlenga (2011) estimated private return to edu-
cation in 13 OECD countries. Their findings suggest that a positive, but weak relation-
ship exists between Gini index and return to education.
 6 W. Qazi et al.

Acar and Dogruel (2012) examined the determinants of income inequality by using
the data from the Middle East and North African regions. It was found that education
and gender participation in the labor force are two major determinants of income
inequality. Checchi and Werfhorst (2014) examine the relationship between distri-
butions of educational achievement, educational policies and distribution of income.
It was proved that educational inequality responds to educational reforms, identifying
educational policies (like late entry into compulsory education or introduction of stan-
dardized tests) and is capable of reducing income inequalities 30 years later. Hence in
Africa education reduces the income equality.
Chani et al. (2014) examined the relationship between the human capital inequality
and income inequality in Pakistan by using the dataset comprising of time starting from
1973 till 2009. The Johanson co-integration and Granger Causality tests techniques
have been applied. The results show that a long-term relationship exists between the
variables. The causality test shows that one-way causal relationship exists between
the human capital inequality and income inequality, that is, income inequality causes
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the human capital inequality. Jackman and Bynoe (2014) examined the relationship
between the education and wage inequality in Barbados by using the sample of 400
Barbadians. They reported that education creates a positive effect on income and it
reduces the wage inequality. Abdullah, Doucouliagos, and Manning (2015) used the
meta-regression analysis to analyze the relationship between the education and
income equality. They reported that education created an impact on the income distri-
bution, by reducing the income of the top achievers and enhancing the share of the
bottom earners. Moreover, in Africa education reduces the income equality.
Some studies show positive and others, negative relationship between education
and income inequality. From the above discussion, we cannot draw any specific
relationship between education and income inequality. Therefore, there is a need for
conducting studies to find the relationship between education and income inequality
in Pakistan.

3. Empirical framework
After reviewing the theoretical and empirical work, the model to examine the relation-
ship between higher education and income inequality is derived using the following fra-
mework:

IIQt = b0 + b1 GDPt + b2 UEMt + b3 INVt + b4 HEDt + 1t , (1)

where 1t is the error term, IIQ is the income inequality which is measured by the Gini
coefficient, GDP is the real GDP, UEM is the percentage of the unemployed labor force,
INV is the total real investment and HED is enrollment of students in higher education
institutes. Annual long-time series data have been used from 1973 to 2012. All data are
gathered from different issues of economic surveys of Pakistan maintained by State bank
of Pakistan and Ministry of Finance, Pakistan. The expected signs for GDP and INV are
negative and for UEM is positive, while the sign of HED is to be determined.
In our basic model we also considered GDP and UEM to control the effects of econ-
omic growth and unemployment in the economy. In this study, we consider GDP as a
proxy of economic growth. The economic growth is a main predictor of income
inequality in developing economies. The economic growth provides new employment
 Studies in Higher Education 7

opportunities in the market, develops the wage structure, and enhances the living stan-
dard of the general public all of which lead to reduce income inequality in the economy.
The relationship between economic growth and income inequality is ascertained by
Kuznets (1955), Chen and Fleisher (1996), Mo (2000), Panizza (2002), Shin (2012),
Malinen (2012), Herzer and Vollmer (2012), Rubin and Segal (2015) and many
others. In past literature, unemployment in the country is considered a main indicator
that may increase the income inequality in the economy (Clark and Kavanagh 1996;
Gustafsson and Johansson 1999; Andres 2005; Helpman, Itskhoki, and Redding
2010; Wu and Wu 2012). In past literature, the researchers also considered investment
as a main determinant to reduce the income inequality in the economy, by providing the
employment opportunities in the new target segments and markets and improving the
wage level by introducing the foreign firms (Glomm and Ravikumar 1992; Pan-Long
1995; Alesina and Perotti 1996; Sylwester 2005; Choi 2006; Jensen and Rosas 2007;
Corak 2013; Lin and Tomaskovic-Devey 2013).
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3.1. Unit root test

Augmented Dickey Fuller (ADF) and Phillip Perron (PP) unit root tests are used to
examine the stationary properties for long-run relationship of time series variables.
ADF2 test is based on the equation given below:

k
DYt = a0 + a1 Yt−1 + dj DYt−j + 1t ,
j=1

where 1t is the pure white noise error term, D is a first difference operator, Yt is a time
series, a0 is the constant and k is the optimum numbers of lags of the dependent vari-
able. ADF test determines whether the estimates of coefficients are equal to zero
(Maqbool-ur-Rahman 2015; Suleman and Amin 2015). The ADF test provides cumu-
lative distribution of ADF statistics. The variable is said to be remained stationary, if the
value of the coefficient a1 is less than the critical values from fuller table. PP3 unit root
test equation is given below:

DYt = a + r∗ Yt−1 + 1t .

The PP unit root test is also based on t-statistics that is associated with estimated
coefficients of r∗ .

3.2. Autoregressive distributed lag (ARDL) bound testing approach

The ARDL method of co-integration developed by Pesaran and Pesaran (1997),
Pesaran and Shin (1999) and Pesaran, Shin, and Smith (2000, 2001) has been used
with the help of the unrestricted vector error correction model to investigate the
long-run relationship between higher education development and income inequality.
The ARDL approach has several advantages upon other co-integration methods. The
ARDL approach may be applied irrespective of whether underlying variables are
purely I(0), I(1) or mutually co-integrated (Pesaran and Shin 1999). The ARDL
approach has estimated better small sample properties (Haug 2002). In ARDL pro-
cedure, the estimations of results are possible if even the explanatory variable is
 8 W. Qazi et al.

endogenous (Pesaran and Shin 1999; Pesaran, Shin, and Smith 2001). The ARDL
model is developed for estimations as follows:

p

p

p

p
DIIQt = c0 + c1 DIIQt−1 + c2 DGDPt−1 +c3 DUEMt−1 + c4 DINVt−1
i=1 i=1 i=1 i=1

p
+ c5 DHEDt−1 + g1 IIQt−1 + g2 GDPt−1 + g3 UEMt−1
i=1

+ g4 INVt−1 + g4 HEDt−1 + mt ,

where c0 is the constant and mt is the white noise error term, and the error correction
dynamics are denoted by the summation sign while the second part of the equation cor-
responds to the long-run relationship. Schwarz Bayesian Criteria (SBC) has been used
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to identify the optimum lag of model and each series. In the ARDL model, we first esti-
mate the F-statistics value by using the appropriate ARDL models. Secondly, the Wald
(F-statistics) test is used to investigate the long-run relationship between the series. The
null hypothesis of no co-integration is rejected if the calculated F-test statistics exceeds
the upper critical bound (UCB) value. The results are said to be inconclusive if the F-
test statistics fall between the upper and lower critical bound. Lastly, the null hypothesis
of no co-integration is accepted if the F-statistics is below the lower critical bound. If
the long-run relationship between higher education development and income inequality
is found, then we estimate the long-run coefficients. The following model will be used
to estimate the long-run coefficients:

p

p

p
IIQt = z0 + z1 IIQt−1 + z2 GDPt−1 + z3 UEMt−1
i=1 i=1 i=1

p

p
+ z4 INVt−1 + z5 HEDt−1 + mt .
i=1 i=1

If we find evidence of the long-run relationship between higher education develop-

ment and income inequality, then we estimate the short-run coefficients by employing
the following model:

p

p

p
DIIQt = w0 + w1 DIIQt−1 + w2 D GDPt−1 + w3 DUEMt−1
i=1 i=1 i=1

p

p
+ w4 DINVt−1 + w5 DHEDt−1 + nECTt−1 + mt .
i=1 i=1

The error correction model shows the speed of adjustment needed to restore the long-
run equilibrium following a short-run shock. The n is the coefficient of the error correc-
tion term in the model that indicates the speed of adjustment.
 Studies in Higher Education 9

4. Estimations and results

To check the stationary properties, we use ADF and PP unit root tests. Table 1 rep-
resents the results of stationary tests. First, these tests are applied at the level of vari-
ables, then on their first difference.
Results of Table 1 show that all variables are stationary and integrated at first differ-
ence. This implies that the series of variables may exhibit a valid long-run relationship.
ARDL method for co-integration is used to estimate the long-run relationship
between higher education development and income inequality. The first step is to deter-
mine the optimal lag length of the variables. The order of optimal lag length is decided
by using the SBC. Table 2 shows the results of the ARDL co-integration method.
The ARDL results suggest the rejection of the null hypothesis of no co-integration
in model because the value of the F-statistics is greater than the upper bound critical
value at the 1% level of significance in favor of the alternative hypothesis that the
valid long-run relationship exists between higher education development and income
inequality in Pakistan.
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Now we estimate the lag length order of the all variables through the unrestricted
vector auto regression method. The decision criterion is based on the minimum
value of SBC.
Table 3 represents the results of the lag length order of all variables. Results of SBC
indicate that all variables should be included in the model at the first lag. After obtaining
valid evidence of the long-run relationship between higher education development and
income inequality, we applied the ARDL method to estimate the long-run and short-run
coefficients. The model for long-run coefficients is as follows:

p

p

p

p
IIQt = z0 + z1 IIQt−1 + z2 GDPt−1 + z3 GDPt−1 + z4 UEMt
i=1 i=1 i=1 i=1

p

p

p
+ z5 UEMt−1 + z6 INVt + z7 INVt−1
i=1 i=1 i=1

p

p
+ z8 HEDt + z9 HEDt−1 + mt .
i=1 i=1

Table 1. Stationary test results.

Augmented Dickey–Fuller Phillips–Perron
I(0) I(1) I(0) I(1)
Variables C C&T C C&T C C&T C C&T
IIQ −2.51 −2.83 −4.11 −4.04 −1.86 −2.07 −4.19 −4.13
GDP 1.89 −1.09 −3.39 −4.17 −1.81 −1.04 −3.39 −4.17
UEM 2.41 −0.21 −5.48 −6.36 2.51 −0.21 −5.58 −6.36
INV −1.82 −2.08 −4.05 −4.20 −1.73 −1.01 −3.89 −3.93
HED 0.72 0.50 4.00 4.52 0.81 0.69 −4.76 −4.16
Source: Authors’ estimation.
Note: The critical values for ADF and PP tests with constant (C) and with constant & trend (C&T) 1%, 5%
and 10% level of significance are −3.711, −2.981, −2.629 and −4.394, −3.612, −3.243, respectively.
 10 W. Qazi et al.

Table 2. Lag length selection and bound testing for cointegration.

Lags order AIC HQ SBC F-test statistics
0 −7.031 −6.954 −6.813 33.258*
1 −17.760* −17.300* −16.454*
2 −17.55 −16.703 −15.152
Source: Authors’ estimation.
*1% level of significant.

Table 4 shows the results of long-run ARDL estimations. The results of economic
growth and real investment have the expected negative and significant relationship with
income inequality. The results of unemployment also showed the expected positive and
significant relationship with income inequality. These findings confirm that economic
growth, real investment and unemployment in the country are the major determinants of
income inequality in Pakistan. Results reveal the negative and significant effect of
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higher education development on income inequality in Pakistan. The coefficient of

higher education shows that the 1% increase in higher education causes the decrease
in the income inequality by 0.073%. It is concluded that the higher expenditure devel-
opment is an important factor to improve income inequality in Pakistan. The findings of
this study are consistent with the earlier available literature which is mostly showing
negative relationship between higher education and income inequality. The following
model is used to check the short-run relationship among the considered variables with
the different lag length.

p

p

p
DIIQt = w0 + w1 DIIQt−1 + w2 D GDPt + w3 DGDPt−1
i=1 i=1 i=1

p

p

p

p
+ w4 DUEMt + w5 DUEMt−1 + w6 DINVt + w7 DINVt−1
i=1 i=1 i=1 i=1

p

p
+ w8 DHEDt + w9 DHEDt−1 + nECTt−1 + mt .
i=1 i=1

Table 5 represents the short-run relationship between higher education and income
inequality. Results indicate that the lagged error correction term for the estimated

Table 3. Lags defined through VAR of variables.

0 1 2 Selected lags
Lag SBC SBC SBC SBC
IIQ −3.477 −4.969a −4.735 1
GDP 1.979 −3.285a −2.823 1
UEM 0.478 −4.658a −4.255 1
INV 1.862 −1.847a −1.478 1
HED 3.252 −1.032a −0.662 1
Source: Authors’ estimation.
a
Minimum SBC values.
 Studies in Higher Education 11

Table 4. Long-run results using ARDL approach.

Variables Coeff. t-Stats Prob.
C −0.097 −0.752 0.460
IIQ (−1) 0.949 2.288 0.029
GDP −0.162 −1.937 0.061
GDP (−1) 0.007 0.067 0.947
UEM 0.402 2.276 0.029
UEM (−1) −0.036 −0.345 0.733
INV −0.094 −2.269 0.030
INV (−1) 0.027 −0.493 0.626
HED −0.073 −3.487 0.001
HED (−1) 0.032 1.371 0.181
Adj. R2 0.868
D.W stats 1.538
F-stats (Prob.) 202.482 (0.000)
Source: Authors’ estimation.
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income inequality equation is both negative and statistically significant. This confirms a
valid short-run relationship between higher expenditure and income inequality in Paki-
stan. The coefficient of the error term shows the value of −0.120 suggesting that about
12% of disequilibrium is corrected in the current year. Results indicate the negative, but
insignificant effect of higher education development on income inequality in the short
run.

5. Stability of long-run model

The stability of long-run model in the sample size is evaluated by using the cumulative
sum (CUSUM) and CUSUM of square test on the recursive residuals. CUSUM test
detects systematic changes from the coefficients of regression, while CUSUM of
square test is able to detect the sudden changes from constancy of regression coeffi-
cients (Brown, Durbin, and Ewans 1975).

Table 5. Short-run results using ARDL approach.

Variables Coeff. t-stats Prob.
C −0.010 −2.884 0.007
ΔIIQ (−1) 0.311 4.745 0.000
ΔGDP −0.012 −2.045 0.049
ΔGDP (−1) −0.022 −1.184 0.245
ΔUEM 0.413 3.573 0.001
ΔUEM (−1) −0.031 −0.383 0.704
ΔINV −0.042 −1.199 0.239
ΔINV (−1) 0.022 0.553 0.584
ΔHED −0.009 −0.957 0.488
ΔHED (−2) 0.012 0.701 0.346
ECM(−1) −0.120 −4.309 0.000
Adj. R2 0.524
D.W stats 1.612
F-stats (Prob.) 31.124 (0.000)
Source: Authors’ estimation.
 12 W. Qazi et al.

Figure 1. Plot of cumulative sum of recursive residuals. The straight lines represent critical
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bounds at the 5% significance level.

Figures 1 and 2 represent the results of the CUSUM and CUSUM of square tests,
respectively. Results indicate that the statistics of both CUSUM and CUSUM of square
test are lying within the interval bands at the 5% confidence interval. Results suggest
that there is no structural instability in the residuals of equation of income inequality.

6. Causality analysis
In this section, three different techniques of causal analysis, namely, Granger causality
analysis,4 Toda and Yamamoto modified Wald test causality analysis5 and variance
decomposition method,6 have been used to analyze the robustness of causal relation-
ship between higher education development and income inequality in Pakistan.

6.1. Granger causality analysis

The direction of causality between dependent and independent variables is first ana-
lyzed by the Granger (1969) causality test. We perform the causality analysis of our

Figure 2. Plot of cumulative sum of squares of recursive residuals. The straight lines represent
critical bounds at the 5% significance level.
 Studies in Higher Education 13

income inequality model on lag one. Jones (1989) favors the ad hoc selection
method for lag length in the Granger causality test over some of the other statistical
method to determine the optimal lag. The equation of the Granger causality model is
given below:

t

t
Y = ai Xt−i + bi Yt−i + m .
i=1 i=1

t

t
X = li Xt−i + di Yt−i + v .
i=1 i=1

It is assumed that m and v are uncorrelated. There are two variables that dealt with
bilateral causality. The above equation states that Y is related to its lag values and X is
related to its lag values.
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The results of the Granger causality test are reported in Table 6. Results show
that the unidirectional causal relationship exists between higher education development
and income inequality which runs from higher education development to income
inequality.

6.2. Toda and Yamamoto modified Wald test causality analysis

The direction of causality between dependent and independent variables is also ana-
lyzed by using the causality test based on the Toda and Yamamoto (1995) procedure.
This test uses a modified Wald (MWALD) test which can be applied irrespective of
whether underlying variables are purely I(0), I(1) or mutually co-integrated. Toda
and Yamamoto (1995) augmented that Granger causality test uses the seemingly unre-
lated regression (SUR) technique through estimating a two-equation system. The Wald
test improves efficiency when SUR models are used in the estimation. So, the model
can be specified as follows:

k+d

k+d
Yt = a1 + g1i Yt−i + g2i Xt−i + 1yt
i=1 t−i

Table 6. Results of granger causality test.

Variables F-statistic Probability
GDP does not Granger Cause IIQ 10.204 0.003
IIQ does not Granger Cause GDP 5.206 0.029
INV does not Granger Cause IIQ 0.884 0.354
IIQ does not Granger Cause INV 4.984 0.032
UMP does not Granger Cause IIQ 9.119 0.001
IIQ does not Granger Cause UMP 6.291 0.005
HED does not Granger Cause IIQ 5.356 0.027
IIQ does not Granger Cause HED 0.210 0.650
Source: Authors’ estimations.
Note: The lag length is 1.
 14 W. Qazi et al.

k +d

k +d
Xt = a2 + d1i Yt−i + d2i Xt−i + 1xt
i=1 t−i

where k is the optimal lag order, d is the maximum order of integration of the series in
the system, and 1yt and 1xt are error terms that are assumed to be white noise. Usual
Wald tests are then applied to the first k coefficient matrices using the standard χ2-
statistics.
The results of the Toda and Yamamoto (1995) procedure-based causality test are
reported in Table 7. Results show the unidirectional causal relationship between
higher education development and income inequality which runs from higher education
development to income inequality.

6.3. Variance decomposition analysis

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The generalized forecast error variance decomposition method under the vector autore-
gressive (VAR) system has also been used to analyze the strength of the causal relation-
ship of military expenditure and income inequality. The variance decomposition
method provides the magnitude of the predicted error variance for a series accounted
for by innovations from each of the independent variable over different time periods.
Wong (2010), Raza and Jawaid (2013), Raza, Shahbaz, and Nguyen (2015), Alam
et al. (2015), Raza (2015) and Raza, Shahbaz, and Paramati (2016) have used this
approach to find causal relationships among considered variables. Table 8 represents
the results of variance decomposition analysis.
Results of Table 8 indicate that in the first round the change in income inequality is
explained 100% by its own innovations. In the second period, 96.17% explained by its
own innovation, 0.05% by GDP, 1.51% by unemployment, 2.24% by investment and
0.03% by higher education development. In period five, the shocks in income inequal-
ity explain 46.20% by own innovation, 15.51% by innovations of GDP, 18.40% by
innovations of unemployment, 11.27% by innovations of investment and 8.62% by
innovations of higher education development. In the tenth period, the shocks in
income inequality explain 6.25% by own shocks, while 23.95% explained by inno-
vations of GDP, 21.74% explained by innovations of unemployment, 25.64%
explained by investment and 22.42% explained by innovations of higher education
development.
The shocks in higher education development explain 70.37%, 65.07%, 49.79% and
42.49% by its own innovations in the period 1, 2, 5 and 10, respectively. The shocks in

Table 7. Results of Toda and Yamamoto Causality Test.

Modified Wald-Statistics
Dependent variable IIQ GDP UEM INV HED
IIQ – 3.753 5.179 5.147 12.161
(0.061) (0.029) (0.029) (0.001)
HED 1.661 7.501 0.128 3.780 _
(0.206) (0.009) (0.722) (0.060)
Source: Authors’ estimations.
Note: The lag length for all variables is 1 as per SBC.
 Studies in Higher Education 15

Table 8. Results of variance decomposition approach.

Period IIQ GDP UEM INV HED
Variance decomposition of IIQ
1 100.000 0.000 0.000 0.000 0.000
2 96.168 0.053 1.508 2.243 0.029
3 85.852 1.289 7.633 4.516 0.711
4 64.676 7.375 14.488 9.708 3.753
5 46.199 15.507 18.399 11.274 8.619
6 38.277 16.434 20.187 13.710 11.391
7 28.560 17.355 21.189 18.545 14.352
8 22.839 19.198 21.846 20.365 15.753
9 13.861 21.903 22.078 24.391 17.766
10 6.254 23.953 21.740 25.638 22.415
Variance decomposition of GDP
1 2.065 97.935 0.000 0.000 0.000
2 4.582 90.238 4.117 0.356 0.706
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3 4.534 83.292 9.037 1.296 1.842

4 3.306 79.397 12.420 2.123 2.753
5 8.681 66.529 14.740 6.416 3.634
6 9.152 61.757 16.979 7.350 4.763
7 12.189 52.752 19.586 9.148 6.326
8 15.263 42.189 22.334 11.893 8.322
9 16.161 33.897 24.708 14.580 10.654
10 16.819 25.364 26.358 18.229 13.229
Variance decomposition of UEM
1 5.862 3.307 90.832 0.000 0.000
2 4.438 7.433 85.670 1.043 1.416
3 3.239 25.692 69.278 0.746 1.045
4 3.324 38.426 56.633 0.715 0.902
5 4.335 43.112 49.950 1.656 0.947
6 6.125 42.417 46.817 3.445 1.196
7 8.288 39.478 45.279 5.399 1.555
8 10.400 36.243 44.431 6.886 2.041
9 12.050 33.551 43.976 7.709 2.714
10 13.044 31.678 43.720 7.907 3.650
Variance decomposition of INV
1 0.066 29.456 1.683 68.795 0.000
2 0.383 46.460 0.634 49.160 3.363
3 1.164 54.601 3.710 33.689 6.836
4 0.991 56.707 7.118 24.875 10.308
5 0.957 56.604 9.505 19.588 13.346
6 2.094 54.718 11.143 15.810 16.234
7 3.834 51.317 12.752 12.822 19.275
8 5.202 47.172 14.570 10.451 22.605
9 5.876 43.145 16.249 8.688 26.041
10 5.999 39.823 17.334 7.562 29.283
Variance decomposition of HED
1 10.725 0.226 7.775 10.908 70.366
2 4.901 5.456 17.614 6.957 65.072
3 2.657 11.938 14.666 8.991 61.748
4 1.508 19.432 11.194 12.436 55.430
5 0.920 25.373 8.716 15.206 49.786

(Continued.)
 16 W. Qazi et al.

Table 8. (Continued.)
Period IIQ GDP UEM INV HED
6 0.659 29.232 7.629 16.411 46.070
7 0.611 31.329 7.409 16.595 44.056
8 0.722 32.274 7.606 16.323 43.074
9 0.944 32.536 7.961 15.919 42.641
10 1.214 32.423 8.365 15.508 42.490
Source: Authors’ estimation.

higher education development explain 10.73%, 4.90%, 0.92% and 1.21% by inno-
vation of income inequality in the period 1, 2, 5 and 10, respectively. These findings
suggest the unidirectional causal relationship between higher education development
and income inequality in Pakistan, which runs from higher education development to
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income inequality.

6.4. Impulse response function

The relationship between the variables can be looked at from a different perspective as
well. The causality is also examined by using the super exogeneity causality technique
because it takes the effect of policy or regime changes in comparison with Granger
causality and Toda and Yamamoto test.
The Granger and Toda and Yamamoto test only explains the direction of causality
between the variables, and the dynamic relationship between them is examined by
using the impulse response function (IRF). In Econometrics, the IRF or impulse
response is the reaction of any dynamic approach which results due to some external
modifications. The IRF investigates the effect of a shock and its reaction on a single

Figure 3. Results of IRF.

 Studies in Higher Education 17

variable and among all the variables within the system. The test measures the impor-
tance as well as the persistency of a particular shock at a single variable as well as
on other variables (Albiman, Suleiman, and Baka 2015). The method is very sensitively
related to the arrangement of the variables of the two identification criteria, that is,
theoretical identification and Cholesky (Recursive) identification are used. However,
if the correlation between the variables is very high then the best method which can
be used is a generalized impulse response.
The results of the IRF are reported in Figure 3. The results suggest that the there is a
significant impulse response among all variables. There are significant negative shocks
created by economic growth, investment and higher education development on income
inequality. Conversely, the unemployment results in significant positive effects on
income inequality in Pakistan. These results also support the findings of long-run analy-
sis and other estimation procedures of causality analysis.
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7. Conclusion and recommendations

This study investigates the impact of higher education development on income inequal-
ity in Pakistan by using the annual time series data from the period of 1973 to 2012. The
ARDL bound testing cointegration approach confirms the valid long-run relationship
between higher education and income inequality. Results indicate that higher education
has a significant negative relationship with the income inequality in the long run. The
results of error correction model suggest the negative, but insignificant effect of higher
education development on income inequality in the short run. Results of CUSUM and
CUSUM of square test suggest that there is no structural instability in the residuals of
equation of income inequality. Results of Granger causality test, Toda and Yamamoto
Modified Wald causality test and variance decomposition test confirm the uni-
directional causal relationship between higher education development and income
inequality in Pakistan which runs from higher education development to income
inequality.
The findings of this study suggest that higher education development would be a
significant policy option to control the income inequality and should be considered
as a means to improving income distribution in Pakistan. Policy-makers should con-
sider higher education development to formulate favorable policies to improve
income distribution in Pakistan. Policy-makers should focus on diversifying their
budget expenditures on more developmental, social and welfare expenditures instead
of non-development expenditures like high military expenditure to enhance the
living standard and decrease income inequality in Pakistan.
The results reveal that higher education reduces the income equality. However, the
attainment of education is highly dependent on the availability of resources. Avail-
ability of resources may not result in quality education, but in order to get the resources
quality education is required. The education level can be improved by investing more
percentage of GDP in the education sector. The educational investment increases the
education expansion. Because of this educational expansion the human capital skills
improved, and as a result the income inequality reduced. The government should
make access to education easier and should try to reduce the inequality in the education.
There should be a pathway between the educational sectors and the employees so that
employers should recruit the potential employees.
The employment opportunities should be increased as this will help the people to
improve their skills and improve their income differences. The workers’ wages
 18 W. Qazi et al.

should be tied to their level of education and productivity. Moreover, through market-
ization the labors working in the same role should earn the same wages irrespective of
the industries and sectors they work for.

Disclosure statement
No potential conflict of interest was reported by the authors.

Notes
1. Social Policy and Development in Pakistan (2003).
2. See Dicky and Fuller (1979).
3. See Phillips and Perron (1988).
4. See Granger (1969).
5. See Toda and Yamamoto (1995).
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6. The variance decomposition method is estimated through VAR framework, it shows the
proportion contribution in one variable caused by the shocks in other variables, Pesaran
and Shin (1998).

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