Economic Inequality: Causes, Consequences, and Measurement Issues.

Abstract

Inequality and fairness have always been at the heart of any political concept aiming at the well-being of the people. The idea of equality is as old as the democracy itself, and besides instrumental reasons for valuing or condemning inequality, the existence of inequality aversion has become a generally accepted fact in Economics. This dissertation contributes to the ensuing debate on causes, consequences, and measurement of inequality. It consists of three essays providing empirical analyses in the broad spectrum of economic inequality, that is, inequality in wages and income. What are the factors which cause inequality to rise or fall within a country over time, and what are the implications of this higher or lower inequality for a country’s economic prosperity? While it would be presumptuous to seek for universal answers to these important questions within the purview of the three essays that follow, this dissertation tries to provide partial explanations by focusing on specific aspects. Restricting my attention to one of the arguably most relevant consequences of inequality in terms of its long-run impact on welfare, I delve into the still unresolved debate on whether inequality is conducive to economic growth in essay one. I then go deeper into the issue of measurement of inequality in essay two, which continues the debate on inequality data and measurement already touched upon in essay one. I thereby concentrate on a measure of wage inequality for one of the main sectors of the economy, the manufacturing industry. The measurement debate is not a trivial one: both causes and consequences of inequality cannot be explored without going into the details of inequality measures, and the availability of appropriate data across countries and over time is a prerequisite for empirical analyses on the topic. In fact, one of the reasons why there is no consensus as to whether inequality between countries has been increasing or decreasing over the last 50 years is the variety of not only measures but also measurement concepts that are used in different studies. These diverse measures are sensitive to distinct parts of the income distribution and hence can change rank orderings of countries, or of changes in inequality over time. Similarly, one of the reasons why the literature is still inconclusive about the impact of inequality on economic growth is the lack of comparability due to the use of different data sources, as well as deficiencies in the underlying data sources themselves. Finally, despite the fact that the debate on the effects of inequality on economic growth remains unresolved, it is important to know which factors cause, or reinforce to it (and which ones do not). Essay three analyses one of the more frequently cited reasons in the public debate for rising (wage) inequality, namely trade. I empirically look into the potential factors related to trade which may lead to rising inequality, and restrict my attention to the one element of inequality directly relevant for trade theory, namely the distribution of wage incomes. More specifically, I draw on the index of manufacturing wage inequality developed in essay two, thereby employing it in one of the few contexts for which I argue it to be suitable.