Can We Have Our Cake and Eat it Too? Liberalization, Economic Growth, and Income Inequality in Advanced Industrial Societies

Abstract

Conventional economic wisdom maintains that liberalization is partially responsible for the recent expansion of income inequality in advanced industrial societies. Yet the empirical evidence is far from conclusive, as some scholars find a robust positive association between liberalization and inequality, while others uncover a significant negative association between these variables. This study attempts to engage with this burgeoning field of research in order to clarify the empirical link between liberalization, economic growth, and income inequality. To achieve this objective, the current study compiles a panel data set of twenty-one developed economies during the years 1970 to 2009. According to the findings, liberalization returns a consistent positive connection with the pretransfer Gini coefficient using a range of regression parameters and robustness checks. Furthermore, although there is some support for the contention that liberalization indirectly decreases inequality by expanding economic growth, these results are far from conclusive as the findings are inconsistent across different equations. In conclusion, the results largely support conventional wisdom as economic liberalization is found to be a positive predictor of income inequality in advanced industrial societies.