Does income inequality explain public debt change in OECD countries?

Abstract

The aim of the paper is to investigate the link between public debt and income inequalities. We use the panel data of OECD countries in 1995–2014, on which we employ random effects within-between model. Our research shows that the growth of income inequalities is associated with the rise of the public debt only longitudinally. Simultaneously, we show that this association is explained with the fluctuations in unemployment rates. A finding, that the effects of inequality on public indebtedness do not go beyond employment levels questions the importance of the median-voter theorem as a theoretical explanation of the investigated relationship. Our research suggests that the relationship is driven mostly by automatic and instantaneous mechanisms of demand stabilization, rather than political action triggered by voting. Moreover, having found no evidence of the between effects of inequality on public debt, we expect the longitudinal effect to be temporary.