Annex I. Definitions and Sources of Variables

This annex provides the definition and the sources of the main variables used in the econometric analysis (Table A1).

Table A1.

Data Description

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1

Frank Wallace and Zhongxia Zhang provided excellent research assistance. We also thank Ricardo Reinoso and Christiana Weekes for editorial assistance.

2

This analysis is based on a sample of 159 advanced, emerging, and developing economies for the period 1980–2012 using a simple growth model (with time and country fixed effects) in which growth depends on initial income (convergence hypothesis), lagged GDP growth, and inequality (as measured by net Gini or the income shares accruing to various quintiles) estimated using system GMM. Augmenting this model with standard growth determinants, such as human and physical capital, does not affect our main findings. See Annex for data sources.

3

Widening income disparities can depress skills development among individuals with poorer parental education background, both in terms of the quantity of education attained (for example, years of schooling) and its quality (that is, skill proficiency). Educational outcomes of individuals from richer backgrounds, however, are not affected by inequality (Cingano 2014).

4

See Carvalho and Rezai (2014) for a discussion of the empirical and theoretical underpinnings of this assertion.

5

In a theoretical setting, Kumhof and Ranciere (2010) and Kumhof and others (2012) show that rising inequality enables investors to increase their holding of financial assets backed by loans to workers, resulting in rising debt-to-income ratios and thus financial fragility. The latter can eventually lead to a financial crisis.

6

See Tsounta and Osueke (2014) and IMF (2014b) for a discussion of the declining inequality trends in Latin America and Middle East and North Africa regions, respectively.

7

Wealth or net worth is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.

8

Based on national balance sheets in nine advanced economies, Piketty and Zucman (2014) find that wealth-income ratios have doubled over the past 40 years.

9

There is a difference between coverage rate of collective bargaining agreement and union density because in many advanced economies multi-employer bargaining and public policies extending the negotiated contract to nonorganized firms guarantee coverage rates in excess of density rates.

10

Stronger labor market institutions could increase unemployment rates, reduce the wage differential between high-skill and low-skill workers, and affect the labor share of income. The overall impact on income inequality, however, can be ambiguous: they increase unemployment, which tends to raise inequality, they can reduce wage dispersion, which tends to lower it, and they increase the wage share, which can have an ambiguous effect on inequality.

11

Tax regimes can influence the mix of compensation, tilting it towards lower taxed forms of compensation, and thereby boost disposable income, particularly at the top. For example, capital gains are often taxed at a lower rate than other income and, in a few countries, they are not taxed at all. Stock options also benefit from preferential tax treatment in many advanced economies.

12

We are unable to also investigate the drivers of wealth inequality due to data unavailability for a broad sample of advanced economies and EMDCs.

13

Our specification uses the average years of education in the population as a proxy for skills; see also Card and DiNardo (2000), essentially implying that the skill premium is determined solely by the supply of skills. Similar results were obtained using alternative measures, such the ratio of earnings from employment after completing tertiary education compared to the earnings after completing upper- and post-secondary education for a smaller sample of OECD countries (available upon request).

14

This finding is also in line with recent research that finds that wage inequality falls during periods when union density is increasing and rises when union membership is in decline (World Bank 2013).

15

Joumard, Pisu, and Bloch (2012) look at the role of taxes and transfers while OECD (2012b) looks at how education policies, progressive taxes and transfers can tackle inequality.

16

These estimates are calculated as the average annual change in the respective variable multiplied by the corresponding coefficient estimate in Table 2, Column 1.

17

In a recent speech, Rajan (2015) refers to economic inclusion—easing access to quality education, nutrition, health care, finance, and markets to all our citizens, as a “necessity for sustainable growth,” in addition to “obviously, a moral imperative.”

Causes and Consequences of Income Inequality: A Global Perspective
Author: Ms. Era Dabla-Norris, Ms. Kalpana Kochhar, Mrs. Nujin Suphaphiphat, Mr. Franto Ricka, and Ms. Evridiki Tsounta