Income inequality-labor productivity relationship: CS-ARDL approach

With the acceleration of globalization, “Reducing Inequalitiesâ€, which is the 10th of the sustainable development goals, has started to attract more attention in the world. Many factors lead to inequality. Therefore, inequality requires consensus and strength at the interdisciplinary, local, national, and international levels. The leading indicator of inequality is income inequality. Its measurability and widespread impact are sources of its importance and priority. Unfair income distribution might have unfavorable effects on employees such as being more reluctant to work and the well-being of workers. In addition, if workers believe they earn less than they deserve, this might negatively affect the labor productivity. Ultimately, this process may cause countries to reduce their production output. This study aims to explore the link between income inequality and labor productivity among 31 countries in Europe with the period of 2005-2019. To do this, a cross-sectional auto-regressive distributed lag model (CS-ARDL) is employed. According to the results, wage inequality damages the productivity of labor. A 1% increase in the wage inequality reduces labor productivity by 0.16%. Moreover, the unequal income distribution has an explanatory power of approximately 33% on the decrease in productivity. This helps to determine the possible effects of the unequal income distribution leading towards two targets. These targets are to create an efficient wage structure and eliminate the destructive effects of inequality, respectively. In terms of the policy effectiveness, simultaneous application of tools may be more beneficial.