THE DRIVERS OF INCOME INEQUALITY IN RICH COUNTRIES

Rising income inequality has recently come centre‐stage as a core societal concern for rich countries. The diagnosis of the forces driving inequality upwards and their relative importance remain hotly contested, notably with respect to the roles of globalization versus technology and of market forces versus institutions and policy choices. This survey provides a critical review and synthesis of recent research. The focus is on income inequality across the entire distribution, rather than only on what has been happening at the very top. We pay particular attention to include what has been learned from the analysis of micro‐data, to ensure that the coverage is not unduly US‐centric and to analyses of the interrelations between the different drivers of inequality. The marked differences in inequality trends across countries and time periods reflect how global economic forces such as globalization and technological change have interacted with differing national contexts and institutions. Major analytical challenges stand in the way of a consensus emerging on the relative importance of different drivers in how income inequality has evolved in recent decades.     

EFFECT OF PUBLIC INVESTMENT ON THE REGIONAL ECONOMIES IN POSTWAR JAPAN

This paper examines the effect of public investment on the regional economies of postwar Japan. It evaluates the effects of efficiency-verses-equity-oriented allocation policies by estimating the aggregate regional production function and calculating the marginal productivity of public capital for each region, using panel data covering the 47 prefectures over the period from 1955 to 2000. The empirical results show that public capital investment has alternated between an allocation policy based on efficiency and one that is based on equity, and, in fact, such investment was used as a policy tool for adjusting income distribution and accelerating economic growth. Numerical simulations are used to analyze the trade-offs between economic efficiency and inter-prefectural equity. The results indicate that in the case of income-elastic labor mobility, an efficiency-oriented allocation policy leads to larger aggregate gross domestic product by promoting both growth and equity simultaneously.     

SOURCES OF REGIONAL INCOME INEQUALITY: AN EXAMINATION OF SMALL REGIONS IN QUEENSLAND

In this study, data for the 125 Local Government Areas of Queensland are used to explain the cross-sectional variation in the Gini coefficient of income inequality. This study updates earlier work for Australian regions that has used the 1981, 1986 and 1991 census data sets and incorporates a wider range of variables, allowing the testing of several competing hypotheses. The study commences with an analysis of the spatial pattern of income inequality in Queensland. Previous work in this area has not considered problems such as spatial autocorrelation, and although no evidence of this is found, the testing uncovers heteroscedasticity with the estimation techniques used in the final version of the model accounting for this problem.     

CENTRAL BANK POLICIES AND INCOME AND WEALTH INEQUALITY: A SURVEY

This paper reviews recent research on the relationship between central bank policies and inequality. A new paradigm which integrates sticky‐prices, incomplete markets, and heterogeneity among households is emerging, which allows for the joint study of how inequality shapes macroeconomic aggregates and how macroeconomic shocks and policies affect inequality. The new paradigm features multiple distributional channels of monetary policy. Most empirical studies, however, analyze each potential channel of redistribution in isolation. Our review suggests that empirical research on the effects of conventional monetary policy on income and wealth inequality yields mixed findings, although there seems to be a consensus that higher inflation, at least above some threshold, increases inequality. In contrast to common wisdom, conclusions concerning the impact of unconventional monetary policies on inequality are also not clear cut. To better understand policy effects on inequality, future research should focus on the estimation of General Equilibrium models with heterogeneous agents.     

FOSSIL FUEL SUBSIDIES,INCOME INEQUALITY,AND POVERTY: EVIDENCE FROM DEVELOPING COUNTRIES

The past two decades have witnessed widespread attempts to reform fossil fuel subsidies in developing countries. If the reforms are likely to improve economic efficiency, the expected effects on income distribution and poverty are more controversial. This paper reviews the recent literature that examines the impacts of fossil fuel subsidies and their reforms on income inequality and poverty in developing countries. It identifies the different channels that have been explored in the literature and surveys the empirical evidence on the importance of these channels in practice. Drawing on diverse country experiences, it also discusses why fossil fuel subsidies are particularly challenging to reform and highlights several ways in which efforts to reform may be feasible and successful.     

WAGE INEQUALITY IN TURKEY: DECOMPOSITION BY STATISTICAL REGIONS, 1980–2001

This paper analyzes wage inequality in the Turkish manufacturing sector annually from 1980 to 2001, and also provides some evidence for inequality in the post‐2001 period. Using the between‐groups component of Theil's T statistic, the paper provides more information on wage inequality. It decomposes the evolution of inequality by statistical regions – The Nomenclature of Territorial Units for Statistics – (i.e. NUTS‐1 and NUTS‐2). The decompositions show that inequality has increased since the late 1980s in the private sector both between regions of NUTS‐1 and NUTS‐2.