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Pitfalls in Testing for Cointegration between Inequality and the Real Income

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  • Ghislain N. Gueye
  • Hyeongwoo Kim
  • Gilad Sorek

Abstract

Frank (2009) constructed a comprehensive panel of state-level income inequality measures using individual tax filing data from the Internal Revenue Service. Employing an array of cointegration exercises for the data, he reported a positive long-run relationship between income inequality and the real income per capita in the US. This paper questions the validity of his findings. First, we suggest a misspecification problem in his approach regarding the order of integration in the inequality index, which shows evidence of nonstationarity only for the post-1980 data. Second, we demonstrate that his findings are not reliable because his panel cointegration tests require cross-section independence, which is inappropriate for the US state-level data. Employing panel tests that allow cross-section dependence, we find no evidence of cointegration between inequality and the real income.

Suggested Citation

  • Ghislain N. Gueye & Hyeongwoo Kim & Gilad Sorek, 2015. "Pitfalls in Testing for Cointegration between Inequality and the Real Income," Auburn Economics Working Paper Series auwp2015-15, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2015-15
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    More about this item

    Keywords

    Inequality; Economic Growth; Cointegration; Cross-Section Dependence; Nonstationarity;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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