Does globalization drive long-run inequality within OECD countries? A guide to policy making

Abstract

We analyse around four decades of annual time-series data revisiting the long-run relationship between globalization and income inequality for 24 OECD member countries across different geographical regions, applying the Yamamoto-Kurozumi multivariate vector autoregression (VAR) framework. We observe that rapid globalization is not the key cause of rising long-run intra country inequality. This result is obtained by controlling for growth, terms of trade, minimum wage legislation, and unionization and found robust by further controlling education. Most of the countries in our study with a long-run relationship reveal the robust reverse causal impact of rising globalization on reducing inequality. Our impulse response breakdown across various sub-components of globalization suggests that economic globalization is not a primary contributor to long-run inequality for developed industrialized countries. Our framework guides future research to concentrate more on country-specific relationships, with policy guidance tailored for each country based on their level of economic development and institutional quality.