The contingent effects of economic growth and institutions on income inequality: An empirical study

This study empirically investigates the moderating effects of institutions interacted with economic growth as determinants of cross-country income inequality. For a sample of 43 advanced and developing countries in the OECD and Varieties of Capitalism (VoC) literature over the period of 1995–2019, we test the hypothesis that the income inequality-increasing effects of GDP growth are reduced by robust institutions through interactive terms between economic growth and labour market institutions, gender-based institutions, and governance-based institutions. We use correlated random effects, feasible generalised least squares, and systems-generalised method of moments for panel data analysis using the Gini coefficient for post-tax and post-transfer household disposable income inequality as the dependent variable. Across all models, we find consistently significant statistical evidence for contingency effects between greater GDP growth rates and robust institutions. More specifically, the positive or inequality-increasing effects of greater GDP growth are shown to be reduced by stronger employment protection legislation and greater gender parity in education. Policy implications on inclusive growth thereby call for labour market reforms in terms of employment protection and improved access to education for women.