Economic Complexity, Shadow Economy, and Income Inequality: Fresh Evidence from Panel Data

Abstract

This research attempts to examine the effects of economic complexity and shadow economy on income inequality for a panel dataset of 99 countries. The two-step system GMM estimation is employed to capture the non-linear relationships among interested variables. The findings indicate that income disparity is significantly and non-linearly linked with economic complexity and gray economy. First, there exists a U-shaped relationship between economic complexity and income disparity. The turning point for which the effect of economic complexity on income inequality changes from negative to positive is −0.732. Second, the impact of the shadow economy on income inequality displays an inverted U-shaped pattern. The estimated threshold above which the marginal effect of the shadow economy on income inequality changes from positive to negative equals 15.6%. Given the complications of these relationships, the governments are advised to take into consideration the situation of these two socio-economic issues when developing income distribution-related policies.