Non‐farm income and inequality in rural Pakistan: A decomposition analysis

Abstract

This article uses three‐year panel data to analyse the impact of non‐farm income on income inequality in rural Pakistan. After pinpointing the importance of rural non‐farm income for the poor, the article decomposes total rural income among five sources: non‐farm, agricultural, livestock, rental and transfer. This decomposition shows that non‐farm income represents an inequality‐decreasing source of income. The study then decomposes the sources of non‐farm income. This analysis reveals that while non‐farm unskilled labour income has an equalising effect on income distribution, non‐farm government income has a disequalising effect.