Book Description

Inequality has been increasing in recent years, both in developed and developing countries. There is, however, still much to be understood on the determinants of inequality at an international level. This thesis aims to contribute to the income inequality literature by focusing on three measures of economic inequality - the Gini coefficient, top income shares, and the middle class income share. Thus, the thesis consists of three core chapters and a concluding chapter which summarises the key findings and suggests further research. The main approach of this thesis is empirical in nature, but the model formulations are well informed by the existing literature. The empirical analysis is based on annual panel-data. The country and time coverage, however, differ due to the data availability. The first substantive chapter (Chapter 2) investigates the dependence of income inequality on social and political inequality, in the presence of the Kuznets inverted-U curve hypothesis. The literature in development economics, political economics, and sociology suggests that income, social, and political inequality are interdependent. The main findings are that an inverted-U curve exists between income inequality (measured by the Gini coefficient) and GDP per capita. Income inequality increases as social and political inequality rise. The effects, however, become reversed when social and political inequality are interacted. While this study is the initial attempt to examine the joint determination of social and political inequality for income inequality, the findings are, overall, consistent with the theoretical and empirical literature. The second paper (Chapter 3) examines the evolution of top income shares using long-term historical data and finds new evidence on the relationship between economic growth and income inequality. In particular, the novelty of this study is the estimation of an asymmetric response of top income shares to different phases of economic growth. The results indicate that top income earners benefit during upturns in economic growth, but do not significantly suffer when the economy has a downturn in growth. In addition, the relationship between inequality (as measured by top income shares) and per capita income presents a U-shaped, instead of inverted-U, curve. This finding contributes to the literature on the Kuznets hypothesis and suggests that the relationship between inequality and per capita income needs to be further examined using different measures of inequality. Moreover, our result supports the persistence of inequality. The third paper (Chapter 4) explores the determinants of the middle class income share. While the middle class is largely neglected in the literature, its importance in economic development and poverty reduction is undeniable. This study contributes to a small, but growing literature on the middle class by examining the potential determinants of the middle class income share. The estimation results suggest that a country tends to have smaller middle class income share if its initial income distribution is skewed. This is consistent with the existing evidence. Economic growth has no significant impact on the middle class income share. The results support the inverted-U curve relationship between inequality and per capita income while the turning-point is relatively small.