In Search of Smoking Guns: What Makes Income Inequality Vary over Time in Different Countries?

Abstract

We investigate the forces affecting the distribution of income by analyzing an unbalanced panel of information for 16 industrialized countries for the years 1966 through 1994. Income inequality is measured with the Gini coefficient of equivalent disposable income; individuals are the unit of analysis; the statistical analysis uses panel methods. The results suggest that many factors affect the development of income inequality. Some factors are strictly economic: A decreased industrial sector generally fosters inequality, and some support is found for the view that increased trade of manufactured goods from developing countries is also a factor. Other forces are outside a strictly defined market sphere: Low inequality is found when a large proportion of the labor force belongs to a trade union and also when there is a large public sector. In addition, demographic circumstances are important, since the proportion of the population under age 15 has a positive effect on inequality. We find, however, no association between the unemployment rate and inequality