The Relationship Between Economic Growth and Income Inequality: A Panel Data Analysis

In this paper, the long-term and the short-term relationship between economic growth and income inequality is investigated. The analysis covers 23 years period between 1993 and 2016 for the selected 14 European Union countries. In order to choose the appropriate model estimators: (i) “Pesaran CD Test” for the existence of cross-section dependency; (ii) “Swamy S Test” for the homogeneity of the parameters; (iii) “Pesaran 2007 CADF Test” for the stationarity of the series; (iv) “Hansen J Test” for the appropriate lag-length value; (v) “Westerlund Panel Cointegration Test” for the cointegration between the series were employed. Accordingly, the “Pooled Mean Group (PMG), Mean Group (MG) and Dynamic Fixed Effects (DFE) Estimators” were employed in the model estimations. With the help of “Hausman Test”, the PMG Estimator was determined as the most appropriate method among others in explaining the model. The PMG estimator revealed that a 1% rise in real economic growth distorts income inequality by 0.22% in the long-term. It is concluded that real economic growth adversely affects income inequlality in the long term. In this context, real economic growth in the long-term can be achieved at the expense of deterioration of income inequality. These results are in contradiction with Kuznets’s view that income inequality can be improved in the longterm.