Relations between income inequality, economic growth and poverty threshold: new evidences from EU countries panels
Abstract
This paper analyses the relationship between the following indicators: income inequality, gross domestic product, risk of poverty threshold and median equivalized net income for a panel of 28 countries of European Union (EU) over the period 2005-2016. Two theoretical regression models, a linear and a quadratic one, are used to estimate the influence on income inequality of the other three indicators. Empirical estimations, using panel data techniques on three different data panels, confirm the Kuznets hypothesis that income inequality tends to increase with early economic development and tends to decrease when a country reaches a certain level of development. We found that for emerging EU countries, income inequality has a growing tendency with a positive economic growth and maybe reduced by increasing risk of poverty threshold or median equivalized net income. For highly developed EU countries the situation is completely opposite. At EU level, the influence of gross domestic product on income inequality is strongly determined by its trend in the highly developed EU countries, while the influence of risk of poverty threshold and median equivalized net income on income inequality is strongly determined by their trend in the emerging EU countries.
First published online 19 November 2019
Keyword : income inequality, GINI index, economic growth, risk of poverty threshold, data panel, regression model, Kuznets hypothesis, European Union
How to Cite
Soava, G., Mehedintu, A., & Sterpu, M. (2020). Relations between income inequality, economic growth and poverty threshold: new evidences from EU countries panels. Technological and Economic Development of Economy, 26(2), 290-310. https://doi.org/10.3846/tede.2019.11335
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Baiardi, D., & Morana, C. (2016). The financial Kuznets curve: Evidence for the euro area. Journal of Empirical Finance, 39, 265-269. https://doi.org/10.1016/j.jempfin.2016.08.003
Baiardi, D., & Morana, C. (2018). Financial development and income distribution inequality in the euro area. Economic Modelling, 70, 40-55. https://doi.org/10.1016/j.econmod.2017.10.008
Ben Amar, M., & Zghidi, N. (2016). The relationship between inclusive growth, inequality and poverty in Africa. Theoretical and Applied Economics, XXIII, 1(606), 117-126.
Binatli, A. O. (2012). Growth and income inequality: A comparative analysis. Economics Research International, Article ID 569890. https://doi.org/10.1155/2012/569890
Bourguignon, F. (2003, November 13). The poverty-growth-inequality triangle. Paper presented at the Conference on poverty, inequality and growth, Paris, France.
Brady, D., & Jäntti, M. (2017). Economic performance, poverty, and inequality in rich countries. In D. Brady, & L. M. Burton (Eds.), The Oxford handbook of the social science of poverty. https://doi.org/10.1093/oxfordhb/9780199914050.001.0001
Brueckner, M., Dabla Norris E., & Gradstein, M. (2015). National income and its distribution. Journal of Economic Growth, 20(2), 149-175. https://doi.org/10.1007/s10887-015-9113-4
Ceriani, L., & Verme, P. (2012). The origins of the Gini index: extracts from Variabilità e Mutabilità (1912) by Corrado Gini. The Journal of Economic Inequality, 10(3), 421-443. https://doi.org/10.1007/s10888-011-9188-x
Chambers, D., & Dhongde, S. (2016). Convergence in income distributions: Evidence from a panel of countries. Economic Modelling, 59, 262-270. https://doi.org/10.1016/j.econmod.2016.07.019
Chang, S., Gupta, R., & Miller, S. M. (2018). Causality between per capita real GDP and income inequality in the U.S.: Evidence from a wavelet analysis. Social Indicators Research, 135(1), 269-289. https://doi.org/10.1007/s11205-017-1792-0
Chemli, L., & Smida, M. (2013). Interaction between poverty, growth, and inequality during the crisis: A panel data study. International Journal of Economics and Finance, 5(5), 120-130. https://doi.org/10.5539/ijef.v5n5p120
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249-272. https://doi.org/10.1016/S0261-5606(00)00048-6
Cingano, F. (2014). Trends in income inequality and its impact on economic growth (OECD Social, Employment and Migration Working Papers No. 163). Paris: OECD Publishing. https://doi.org/10.1787/5jxrjncwxv6j-en
Darvas, Z. (2019). Why is it so hard to reach the EU’s poverty target? Social Indicators Research, 141(3), 1081-1105. https://doi.org/10.1007/s11205-018-1872-9
Edward, P., & Sumner, A. (2018). Global poverty and inequality: are the revised estimates open to an alternative interpretation? Third World Quarterly, 39(3), 487-509. https://doi.org/10.1080/01436597.2017.1401461
Engle, G., & Granger, C. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-276. https://doi.org/10.2307/1913236
European Anti-Poverty Network. (2016). Letter sent to President of the European Commission Mr JeanClaude Juncker about the Annual Growth Survey 2017. Retrieved from http://www.eapn.eu/wpcontent/uploads/2016/10/EAPN-2017-EAPN-letter-Juncker-AGS2017-630.pdf
European Commission. (2017). Europe 2020 strategy. Retrieved from https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/framework/europe-2020-strategy_en
European Union. (2013). Regulation (EU) No 1304/2013 of the European Parliament and of the Council on the European Social Fund and Repealing Council Regulation (EC) No 1081/2006. Retrieved from http://data.europa.eu/eli/reg/2013/1304/oj
EViews 9. (2015). User’s Guide I, II. IHS Global Inc. Retrieved from www.eviews.com
Fosu, A. K. (2017). Growth, inequality and poverty reduction in developing countries: recent global evidence. Research in Economics, 71(2), 306-336. https://doi.org/10.1016/j.rie.2016.05.005
Grijalva, D. F. (2011). Inequality and economic growth: Bridging the short-run and the long-run. University of California, Irvine. Retrieved from http://www.democracy.uci.edu/files/democracy/docs/conferences/grad/2011/Diego%20-%20Inequality%20and%20growth%20CSD.pdf
Halmos, K. (2011). The effect of FDI, exports and GDP on income inequality in 15 Eastern European countries. Acta Polytechnica Hungarica, 8(1), 123-136.
Hillebrand, E. (2009). Poverty, growth, and inequality over the next 50 years. Paper presented at the Expert Meeting on How to Feed the World in 2050, Food and Agriculture Organization of the United Nations Economic and Social Development Department.
Inyong, S. (2012). Income inequality and economic growth. Economic Modelling, 29(5), 2049-2057. https://doi.org/10.1016/j.econmod.2012.02.011
Jauch, S., & Watzka, S. (2016). Financial development and income inequality: a panel data approach. Empirical Economics, 51(1), 291-314. https://doi.org/10.1007/s00181-015-1008-x
Kao, C. (1990). Spurious regression and residual-based tests for cointegration in panel data. Journal of Economics, 90, 1-44. https://doi.org/10.1016/S0304-4076(98)00023-2
Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.
Laurinavičius, A., & Galinienė, B. (2013). Asset-based approach to poverty reduction in Lithuania. Technological and Economic Development of Economy, 19(2), 203-223. https://doi.org/10.3846/20294913.2013.796609
Levin, M., Lin, C. F., & Chu, C. S. (2002). Unit root tests in panel data: asymptotic and finite sample properties. Journal of Economics, 108, 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Luan, Z., & Zhou, Z. (2017). The relationship between annual GDP growth and income inequality: Developed and undeveloped countries. Econ, 3161, 1-16. Retrieved from https://smartech.gatech.edu/bitstream/handle/1853/56630/paper-2.docx.pdf
Mihi-Ramírez, A., Kumpikaitė-Valiūnienė, V., & Cuenca-García, E. (2017). An inclusive analysis of determinants of international migration. The case of European rich and poor countries. Technological and Economic Development of Economy, 23(4), 608-626. https://doi.org/10.3846/20294913.2017.1306726
OECD. (2014). Correlation between Gini coefficients and GDP per capita, 1820–2000. https://doi.org/10.1787/9789264214262-graph88-en
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653-673. https://doi.org/10.1111/1468-0084.61.s1.14
Rubin, A., & Segal, D. (2015). The effects of economic growth on income inequality in the US. Journal of Macroeconomics, 45, 258-273. https://doi.org/10.1016/j.jmacro.2015.05.007
Škare, M., & Pržiklas Družeta, R. (2016). Poverty and economic growth: a review. Technological and Economic Development of Economy, 22(1), 156-175. https://doi.org/10.3846/20294913.2015.1125965
Soava, G., Mehedintu, A., Sterpu, M., & Raduteanu, M. (2018). Impact of renewable energy consumption on economic growth: evidence from European Union countries. Technological and Economic Development of Economy, 24(3), 1197-1215. https://doi.org/10.3846/tede.2018.1426
Strielkowski, W., & Höschle, F. (2016). Evidence for economic convergence in the EU: the analysis of past EU enlargements. Technological and Economic Development of Economy, 22(4), 617-630. https://doi.org/10.3846/20294913.2014.890138
World Bank. (2001). World development report 2000/2001: Attacking poverty. New York: Oxford University Press. Retrieved from http://hdl.handle.net/10986/11856
Zagorski, K., Evans, M. D. R., Kelley, J., & Piotrowska, K. (2014). Does national income inequality affect individuals’quality of life in Europe? Inequality, happiness, finances, and health. Social Indicators Research, 117(3), 1089-1110. https://doi.org/10.1007/s11205-013-0390-z
Baiardi, D., & Morana, C. (2018). Financial development and income distribution inequality in the euro area. Economic Modelling, 70, 40-55. https://doi.org/10.1016/j.econmod.2017.10.008
Ben Amar, M., & Zghidi, N. (2016). The relationship between inclusive growth, inequality and poverty in Africa. Theoretical and Applied Economics, XXIII, 1(606), 117-126.
Binatli, A. O. (2012). Growth and income inequality: A comparative analysis. Economics Research International, Article ID 569890. https://doi.org/10.1155/2012/569890
Bourguignon, F. (2003, November 13). The poverty-growth-inequality triangle. Paper presented at the Conference on poverty, inequality and growth, Paris, France.
Brady, D., & Jäntti, M. (2017). Economic performance, poverty, and inequality in rich countries. In D. Brady, & L. M. Burton (Eds.), The Oxford handbook of the social science of poverty. https://doi.org/10.1093/oxfordhb/9780199914050.001.0001
Brueckner, M., Dabla Norris E., & Gradstein, M. (2015). National income and its distribution. Journal of Economic Growth, 20(2), 149-175. https://doi.org/10.1007/s10887-015-9113-4
Ceriani, L., & Verme, P. (2012). The origins of the Gini index: extracts from Variabilità e Mutabilità (1912) by Corrado Gini. The Journal of Economic Inequality, 10(3), 421-443. https://doi.org/10.1007/s10888-011-9188-x
Chambers, D., & Dhongde, S. (2016). Convergence in income distributions: Evidence from a panel of countries. Economic Modelling, 59, 262-270. https://doi.org/10.1016/j.econmod.2016.07.019
Chang, S., Gupta, R., & Miller, S. M. (2018). Causality between per capita real GDP and income inequality in the U.S.: Evidence from a wavelet analysis. Social Indicators Research, 135(1), 269-289. https://doi.org/10.1007/s11205-017-1792-0
Chemli, L., & Smida, M. (2013). Interaction between poverty, growth, and inequality during the crisis: A panel data study. International Journal of Economics and Finance, 5(5), 120-130. https://doi.org/10.5539/ijef.v5n5p120
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249-272. https://doi.org/10.1016/S0261-5606(00)00048-6
Cingano, F. (2014). Trends in income inequality and its impact on economic growth (OECD Social, Employment and Migration Working Papers No. 163). Paris: OECD Publishing. https://doi.org/10.1787/5jxrjncwxv6j-en
Darvas, Z. (2019). Why is it so hard to reach the EU’s poverty target? Social Indicators Research, 141(3), 1081-1105. https://doi.org/10.1007/s11205-018-1872-9
Edward, P., & Sumner, A. (2018). Global poverty and inequality: are the revised estimates open to an alternative interpretation? Third World Quarterly, 39(3), 487-509. https://doi.org/10.1080/01436597.2017.1401461
Engle, G., & Granger, C. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-276. https://doi.org/10.2307/1913236
European Anti-Poverty Network. (2016). Letter sent to President of the European Commission Mr JeanClaude Juncker about the Annual Growth Survey 2017. Retrieved from http://www.eapn.eu/wpcontent/uploads/2016/10/EAPN-2017-EAPN-letter-Juncker-AGS2017-630.pdf
European Commission. (2017). Europe 2020 strategy. Retrieved from https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/framework/europe-2020-strategy_en
European Union. (2013). Regulation (EU) No 1304/2013 of the European Parliament and of the Council on the European Social Fund and Repealing Council Regulation (EC) No 1081/2006. Retrieved from http://data.europa.eu/eli/reg/2013/1304/oj
EViews 9. (2015). User’s Guide I, II. IHS Global Inc. Retrieved from www.eviews.com
Fosu, A. K. (2017). Growth, inequality and poverty reduction in developing countries: recent global evidence. Research in Economics, 71(2), 306-336. https://doi.org/10.1016/j.rie.2016.05.005
Grijalva, D. F. (2011). Inequality and economic growth: Bridging the short-run and the long-run. University of California, Irvine. Retrieved from http://www.democracy.uci.edu/files/democracy/docs/conferences/grad/2011/Diego%20-%20Inequality%20and%20growth%20CSD.pdf
Halmos, K. (2011). The effect of FDI, exports and GDP on income inequality in 15 Eastern European countries. Acta Polytechnica Hungarica, 8(1), 123-136.
Hillebrand, E. (2009). Poverty, growth, and inequality over the next 50 years. Paper presented at the Expert Meeting on How to Feed the World in 2050, Food and Agriculture Organization of the United Nations Economic and Social Development Department.
Inyong, S. (2012). Income inequality and economic growth. Economic Modelling, 29(5), 2049-2057. https://doi.org/10.1016/j.econmod.2012.02.011
Jauch, S., & Watzka, S. (2016). Financial development and income inequality: a panel data approach. Empirical Economics, 51(1), 291-314. https://doi.org/10.1007/s00181-015-1008-x
Kao, C. (1990). Spurious regression and residual-based tests for cointegration in panel data. Journal of Economics, 90, 1-44. https://doi.org/10.1016/S0304-4076(98)00023-2
Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.
Laurinavičius, A., & Galinienė, B. (2013). Asset-based approach to poverty reduction in Lithuania. Technological and Economic Development of Economy, 19(2), 203-223. https://doi.org/10.3846/20294913.2013.796609
Levin, M., Lin, C. F., & Chu, C. S. (2002). Unit root tests in panel data: asymptotic and finite sample properties. Journal of Economics, 108, 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Luan, Z., & Zhou, Z. (2017). The relationship between annual GDP growth and income inequality: Developed and undeveloped countries. Econ, 3161, 1-16. Retrieved from https://smartech.gatech.edu/bitstream/handle/1853/56630/paper-2.docx.pdf
Mihi-Ramírez, A., Kumpikaitė-Valiūnienė, V., & Cuenca-García, E. (2017). An inclusive analysis of determinants of international migration. The case of European rich and poor countries. Technological and Economic Development of Economy, 23(4), 608-626. https://doi.org/10.3846/20294913.2017.1306726
OECD. (2014). Correlation between Gini coefficients and GDP per capita, 1820–2000. https://doi.org/10.1787/9789264214262-graph88-en
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653-673. https://doi.org/10.1111/1468-0084.61.s1.14
Rubin, A., & Segal, D. (2015). The effects of economic growth on income inequality in the US. Journal of Macroeconomics, 45, 258-273. https://doi.org/10.1016/j.jmacro.2015.05.007
Škare, M., & Pržiklas Družeta, R. (2016). Poverty and economic growth: a review. Technological and Economic Development of Economy, 22(1), 156-175. https://doi.org/10.3846/20294913.2015.1125965
Soava, G., Mehedintu, A., Sterpu, M., & Raduteanu, M. (2018). Impact of renewable energy consumption on economic growth: evidence from European Union countries. Technological and Economic Development of Economy, 24(3), 1197-1215. https://doi.org/10.3846/tede.2018.1426
Strielkowski, W., & Höschle, F. (2016). Evidence for economic convergence in the EU: the analysis of past EU enlargements. Technological and Economic Development of Economy, 22(4), 617-630. https://doi.org/10.3846/20294913.2014.890138
World Bank. (2001). World development report 2000/2001: Attacking poverty. New York: Oxford University Press. Retrieved from http://hdl.handle.net/10986/11856
Zagorski, K., Evans, M. D. R., Kelley, J., & Piotrowska, K. (2014). Does national income inequality affect individuals’quality of life in Europe? Inequality, happiness, finances, and health. Social Indicators Research, 117(3), 1089-1110. https://doi.org/10.1007/s11205-013-0390-z