The Economic Effect of Structural Change on Income Inequality in Iran during 1981-2014

Structural change is a long term economic change in the basic structure of an economy that is often related to economic growth and improvement in income distribution. Structural change in developing countries is supposed to raise living standards and to reduce poverty. Structural change might cause a considerable transition from low-income rural agricultural economy to an industrial urban economy with higher per capita income. So, in developing countries, structural change is expected to improve income distribution and alleviate absolute poverty. This research aims to study the relationship between structural change and income distribution in Iran for the period 1981-2014. Using principal components analysis, a composite index for structural change is constructed from primary structural variables. The model of this study is based on a Cobb-Douglas production function. This model is estimated by using co-integration approach and autoregressive distributed lags (ADRL) method. Results suggest that change in economic structure has significant positive effect on income distribution.