Inequality,growth, and environmental quality trade‐offs in a model with human capital accumulation

This paper develops a simple endogenous growth model where pollution exposure and vulnerability are unequally spread across the population, and growth and distribution are endogenous. In this set‐up, we investigate whether trade‐offs between growth, distributional, and environmental concerns may emerge. We show that a tighter environmental policy reduces income inequality and can improve both growth and total welfare. Immediate welfare losses, though, do occur, and are larger for countries that start at low levels of environmental quality (e.g. developing countries).     

All About the Giants: Probing the Influences on World Growth and Income Inequality at the End of the 20th Century

This paper presents estimates of world output growth from 1970to 2000, the distribution of income among countries and personsfor the years 1980, 1990 and 2000, and world income povertyrates for the same years. It also presents the results of aseries of simulation exercises that attempt to isolate the effectof particular country and regional experiences on world outputgrowth and changes in global income inequality and poverty. The authors find that rapid growth in China (despite a downwardadjustment of official growth estimates) had a powerful impacton the growth of world output in both the 1980s and 1990s, butthat negative economic growth in Eastern Europe more than offsetthat effect in the 1990s. With respect to the distribution ofworld income between countries, the impressive growth performancesof the worlds most populous countries, China and India, ensureddecreasing levels of inequality during both the 1980s and 1990s.When the distribution of world income between persons is measured,the equalizing effect of China's rapid growth remains dominantthrough both the 1980s and 1990s, despite the contradictoryimpact of increasing domestic inequality. Only India's influenceremained substantial by comparison. Other identifiable eventsof the period, such as the economic contraction in Eastern Europeand continued economic decline in Africa, had little statisticalimpact. However, when the combined influence of China and India'sabove-average growth rates is removed, or their size effectdampened, the improving global distribution of (inter-countryand inter-personal) income suggested by all statistical measuresbecomes one of sharply worsening inequality. The impact of thesetwo countries is similarly critical with respect to global povertyreduction. (JEL F0, I3, O4)     

Growth, Inequality, and Well-Being: Intertemporal and Global Comparisons

We use several well-being measures that combine average incomewith a measure of inequality to undertake intertemporal andglobal comparisons of wellbeing. The conclusions emerging fromthe intertemporal analysis are that the impact of these measureson temporal trends in well-being is relatively small on average,but changing across the decades. In particular, it suggeststhat changes in well-being were understated in the 1960s and1970s and overstated in the 1980s and 1990s. Our global analysiscovering ca. 81 per cent of the world's population demonstratesthat global well-being is at least 50 per cent smaller thanworld per capita income if the unequal income distribution isalso factored in. Conversely, growth in world well-being hasbeen larger than world income growth between 1970–1998.Since the inclusion of inequality has an important impact onwell-being comparisons, it is of great importance to generatemore consistent and intertemporally as well as internationallycomparable data on inequality. (JEL I31, D63)     

The Impact of Liberalisation and Globalisation on Within-country Income Inequality

The paper reviews changes in within-country income inequalityover the last forty years, with particular attention to theyears of 1980–2000, against the background of the inequalityshifts intervened during the globalisation of 1870–1914.Withincountry inequality appears to have risen to differentextents in two thirds of the 73 countries analysed, overturningin several cases prior trends towards lower inequality. Forthe majority of the countries analysed, the paper rejects thehypotheses that such rise is due to a worsening of the traditionalcauses of inequality, such as high land concentration and inequalityin education, or to technological changes. Most of the recentsurge in income polarisation would appear to be related to thepolicy drive towards domestic deregulation and external liberalisation,though the specific impact of each policy instrument appearto vary considerably. (JEL D31, F02)     

Inequality and Economic Growth: A Global View Based on Measures of Pay

This paper discusses two issues in the relationship betweeninequality and economic growth: the data and the econometrics.We first review the income inequality data set of Deiningerand Squire (D&S), which, we argue, fails to provide eitheradequate or accurate coverage, whether through time or acrosscountries. We then introduce our own measures of the inequalityof manufacturing pay, based on UNIDO's Industrial Statistics.These provide indicators of pay inequality that are more stable,more reliable and in our view also more comparable across countries,than the D&S data. Turning to the fabled "Kuznets" relationship between inequalityand economic development, we diagnose several common econometricproblems in the literature, including measurement error andomitted variable bias. By taking steps to account for theseproblems, and by introducing a more complete panel data setbased on pay inequalities, we seek more reliable inferencesconcerning the relationship between inequality, national incomeand economic growth. We find evidence that generally supportsKuznets' specification for industrializing countries: pay inequalitytends to decline as per capita income increases, though withsome tendency for the relationship to curve up for the richestcountries. After 1981 two findings emerge. First, per capitaGDP growth slowed dramatically in most countries, increasinginequality along the augmented Kuznets curve. Second, thereis a global and macroeconomic effect that produces rising inequalityin our data, independent of GDP or its changes. The timing ofthis effect suggests a link to the high real interest ratesand global debt crisis of the period beginning in 1982. (JELC23, D31, J31, O11)     

Education, Social Equality and Economic Growth: A View of the Landscape

Education has been one of the key determinants of economic growtharound the world since 1965. In this paper, we discuss threedifferent measures of education, and consider their relationshipto the distribution of income as measured by the Gini coefficientas well as to economic growth across countries. The three measuresare: (a) gross secondary-school enrolment, (b) public expenditureon education relative to national income and (c) expected yearsof schooling for girls. We show that all three measures of educationare directly related to income equality across countries. Ina sample of 87 countries at all income levels, we also findthat more and better education appears to encourage economicgrowth directly as well as indirectly through increased socialequality and cohesion. Our regression results survive the introductionof regional dummy variables for Africa, Asia and Central andSouth America. We argue that the empirical relationship betweeneducation, on the one hand, and growth and equality, on theother hand, can help account for the positive correlation betweenthe two latter variables that has been documented in the literature.(JEL 128, O15, O40)     

Is International Trade More Beneficial to Lower Income Economies? An Empirical Inquiry

Does the effect of international trade on income growth depend on the economy’s level of development? More specifically, is trade more beneficial to lower income economies? Does trade contribute to a smaller international income inequality? The present paper seeks to answer these questions by employing the empirical model of Frankel and Romer (1999 ), which shows trade increases income growth in a cross section of 150 countries. We find evidence in support of the hypothesis that international trade benefits the lower income economies more than it benefits the higher income economies. This finding is robust in the presence of control variables including distance from the equator and institutional quality.     

On poverty traps,thresholds and take-offs

Recent studies on economic growth focus on persistent inequality across countries. In this paper we study mechanisms that may give rise to such persistent inequality. We consider countries that accumulate capital in order to increase the per capita income in the long run. We show that the long-run growth dynamics of those countries can generate a twin-peak distribution of per capita income. The twin-peak distribution is caused by (1) locally increasing returns to scale and (2) capital market constraints. These two forces give rise to a twin-peaked distribution of per capita income in the long run. In our model investment decisions are separated from consumption decisions and we thus do not have to consider preferences. Empirical evidence in support of a twin-peak distribution of per capita income is provided.     

Income Inequality in OECD Countries: Data and Explanations

There is much disagreement about both the facts and the explanationsof income inequality. Even if we confine attention to OECD countries,we find people arguing that there has been a great U-turn, withinequality rising sharply after its post war fall, and otherswho believe that the speed of change is glacial. In order toevaluate the historical record, we need data for a long runof years. The present paper reviews evidence about coveringthe period 1945–2001 for nine OECD countries. It is widelybelieved that rising inequality is attributable to technologicalchange and to globalisation. The second part of the paper arguesthat these are only part of a complex story. Household incomesdepend on public policy and on sources of income apart fromwork. What is happening at the top of the distribution may needto be explained quite differently. (JEL H0, E6)     

Corruption, Income Distribution, and Growth

This paper uses an encompassing framework developed by Murphy et al. (1991, 1993) to study corruption and how it affects income distribution and growth. We find that (1) corruption affects income distribution in an inverted U-shaped way, (2) corruption alone also explains a large proportion of the Gini differential across developing and industrial countries, and (3) after correcting for measurement errors, corruption seems to retard economic growth. But the effect is far less pronounced than the one found in Mauro (1995). Moreover, corruption alone explains little of the continental growth differentials. In countries where the asset distribution is less equal, corruption is associated with a smaller increase in income inequality and a larger drop in growth rates.     

ECONOMIC FREEDOM AND GROWTH IN U.S. STATE‐LEVEL MARKET INCOMES AT THE TOP AND BOTTOM

This paper investigates the relationship between economic freedom and income growth and inequality across U.S. states over the period 1979–2011. The focus is on market income at the top and bottom of the income distribution. Results show that increases in overall freedom are associated with average income growth. When viewed separately, an increase in overall freedom is associated with larger income growth rates for income earners in the bottom 90% relative to the top 10%. Interestingly, results show that increases in overall economic freedom are related to larger relative growth rates for the top 10% incomes within high‐income states and larger relative growth rates for the bottom 90% incomes within low‐income states. Top‐to‐bottom income ratio regressions suggest a negative and statistically significant relationship between economic freedom and income inequality. (JEL D63, P16, R11)     

The impact of trade on employment,welfare, and income distribution in unionized general oligopolistic equilibrium

This paper sets up a multi-sector general oligopolistic equilibrium trade model in which all firms face wage claims of firm-level unions. By accounting for productivity differences across industries, the model features income inequality along multiple lines, including inequality between firm owners and workers as well as within these two groups of agents, and involuntary unemployment. We use this setting to study the impact of trade liberalization on key macroeconomic performance measures. In particular, we show that a movement from autarky to free trade with a fully symmetric partner country lowers union wage claims and therefore stimulates employment and raises welfare. Whether firms can extract a larger share of rents in the open economy depends on the competitive environment in the product market. Furthermore, the distribution of profit income across firm owners remains unaffected, while the distribution of wage income becomes more equal when a country opens up to trade with a fully symmetric trading partner. We also analyze how country size differences and technological dissimilarity of trading partners affect the results from our analysis.     

Does economic freedom increase income inequality? Evidence from the EU countries

This paper examines the relationship between economic liberalization and income inequality in the EU using panel data for the 2000s. The empirical evidence suggests that economic freedom is strongly related to income inequality. However, not all areas of economic freedom affect income distribution similarly. Government size is robustly associated with inequality, and also when controlling for potential endogeneity in a dynamic panel data analysis. Regulation is linked to income inequality as well, whereas legal system and sound money have no significant effects on income distribution. In the case of freedom to trade internationally, the relationship differs between old (EU-15) and new (former socialist) EU countries.     

Income inequality and export prices across countries

This paper provides theory and evidence on the links between income inequality within a destination country and the patterns of trade and export prices. The theoretical framework relates income inequality to product quality and prices using a simple demand composition effect. The model predicts that a more unequal income distribution in a destination country leads to higher average prices, though the effect is nonlinear and disappears for rich enough countries. The predictions are tested using detailed firm‐level data. Controlling for income per capita, prices are systematically higher in more unequal destinations, and the strength of this effect depends on income per capita. Results are particularly important for middle‐income countries and hold only for differentiated goods, and in particular for products with a high degree of vertical differentiation.     

Inequality and Growth in a Panel of Countries

Evidence from a broad panel of countries shows little overall relation between income inequality and rates of growth and investment. For growth, higher inequality tends to retard growth in poor countries and encourage growth in richer places. The Kuznets curve—whereby inequality first increases and later decreases during the process of economic development—emerges as a clear empirical regularity. However, this relation does not explain the bulk of variations in inequality across countries or over time.     

Entrepreneurship and income inequality: a spatial panel data analysis

The main objective of this paper is to empirically analyze the relationship between entrepreneurship and income inequality. We use a spatial panel data analysis for both 33 high-income countries and 39 middle- and low-income countries over a period of 11 years. Estimation results and rigorous diagnostic analysis suggest that: (i) there is a strong support for the existence of an inverted U-shaped relationship between entrepreneurship and income inequality espoused by the Kuznets Curve hypothesis; (ii) the relationship between entrepreneurship and income inequality is negatively moderated by country’s level of economic development; (iii) regardless of income inequality levels, entrepreneurship has a non-linear relationship with income per capita; (iv) gross domestic expenditure on research and development exhibits significant negative impacts on entrepreneurship; (v) significant mixed effects on the likelihood of entrepreneurial activity are observed with governance, globalization, population growth rate, and competitiveness variables; (vi) there are significant mixed feedback effects on entrepreneurship; and (vii) there are statistically significant, positive as well as negative spatial spillovers to country-level entrepreneurial activity.     

IRELAND's INCOME DISTRIBUTION IN COMPARATIVE PERSPECTIVE

There are concerns that the unprecedented economic boom which Ireland experienced in the second half of the 1990s has raised only some living standards and has widened income gaps. This paper analyzes Ireland's income distribution in comparative perspective, to understand how Ireland's distribution changed and how it compares to other rich countries. We begin with OECD (Organization for Economic Cooperation and Development) and the Luxembourg Income Study (LIS) data to compare Ireland's degree of well-being and inequality with other advanced countries. We also look in some detail at alternative sources of Irish income and their implications for the trends in income inequality in Ireland from 1994 to 2000. For instance, we examine the top of the distribution using data from the administration of the income tax system. We conclude that the spectacular economic growth in the past decade has seen the gap in average income between Ireland and the richer OECD countries narrow dramatically. However, this growth has not greatly affected the Irish ranking in terms of income inequality. Ireland remains an outlier among rich European nations in its high degree of income inequality, though still falling well short of the level seen in the United States. In the end, we find that Ireland's new-found prosperity provides a "social dividend," and choices about how it is used will fundamentally affect whether the current high level of income inequality persists into the future.     

Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?

There has been little systematic empirical literature on the linkage between income inequality and FDI (Basu and Guariglia, 2007; Tsai, 1995). This paper analyzes the effects of foreign direct investment (FDI) on income inequality and asks whether the relationship depends on absorptive capacity or not, by using a cross-sectional dataset taken from 54 countries over the period 1980–2005. We adopt the endogenous threshold regression model proposed by Hansen (2000) and Caner and Hansen (2004) and find strong evidence of a two-regime split in our sample. That is, FDI is likely to be harmful to the income distribution of those host countries with low levels of absorptive capacity. By contrast, our results support the perspective that FDI has little effect on income inequality in the case of countries with better absorptive capacity. It is also shown that international trade can lead to more equal income distribution.     

The Evolution of Income-related Health Inequalities in Switzerland Over Time

This article presents new evidence on income-related healthinequality and its development over time in Switzerland. Weemploy the methods lined out in Van Doorslaer and Jones (2003,"Inequalities in self-reported health: validation of a new approachto measurement", Journal of Health Economics 22(1), 61–78)and Van Doorslaer and Koolman (2004, "Explaining the differencesin income-related health inequalities across European Countries",Health Economics 22(7), 609–628) measuring health usingan interval regression approach to compute concentration indicesand decomposing inequality into its determining factors. Nationallyrepresentative survey data for 1982, 1992, 1997, and 2002 areused to carry out the analysis. Looking at each of the fouryears separately the results indicates the usual positive relationshipbetween income and health, but the distribution is among theleast unequal in Europe. No clear trend emerges in the evolutionof the inequality indices over the two decades. A small butsignificant increase over the first 15 years is followed bystabilization if not a slight decrease in total income-relatedhealth inequality. The most important contributors to healthinequality are income, education and activity status, in particular,retirement. Regional differences including the widely varyinghealth care supply, in contrast, do not exert any systematicinfluence. (JEL codes: D32, I10, I12)     

Trade liberalisation,market competition and wage inequality in China's manufacturing sector

Economic reforms of the late 1980s have contributed to rapid economic growth in China. While the overall standard of living has improved, economic growth has also resulted in an increase in income inequality. Rising income inequality can increase social tensions that can impede further economic growth. By making use of firm level panel data, this paper focuses on the impact of increased market competition and trade liberalisation on skilled–unskilled wage inequality in China's manufacturing sector. A theoretical model is used to argue that trade liberalisation and market competition can affect skilled–unskilled wage inequality. Based on this result, an econometric model is specified. The empirical analysis presented in this paper shows that increased trade liberalisation has contributed to an increase in skilled–unskilled wage inequality in China's manufacturing sector. However, increase in market competition has the opposite effect.