Managing the impact of globalization and technology on inequality

Abstract

This article tests the relative importance of globalization and technological change in explaining income inequality at higher and lower development levels. Besides, the article analyses the effectiveness of a set of policy measures for fighting inequality. We use relative pre-tax income shares as a proxy for inequality. Several linear and non-linear threshold panel data models with GDP per capita as the threshold variable are estimated for 42 countries over the period from 1994 to 2016. We find that technology is the most important generator of inequality, while the effect of various globalization measures is weak and often insignificant. We find limited evidence that the effect of globalization differs with respect to the level of GDP per capita. Our results suggest that full employment policies in the low inflation environment are the most efficient solution for the inequality problem. Higher employment and low inflation rate decrease the inequality level. Other than that, we do not find other policy measures that satisfy the one-size-fits-all criteria for tackling inequality. Instead, a set of efficient policy measures against inequality, including expenditures on education, minimum wage policies, and lending rates, depend on the development level and idiosyncratic policies and institutions.