Exploring Macroeconomic Factors of Income Inequality: A Comparative Analysis of Emerging Markets and Developing Economies and Advanced Economies

Abstract

Income inequality has exhibited a dynamic and variable trend throughout history. After declining post World War II in Advanced Economies (AEs), it surged during the 1980s due to sluggish economic growth. Meanwhile, Emerging Markets and Developing Economies (EMDEs) witnessed higher Gini Coefficients during the 1980s but saw moderate levels of inequality in the early 2000s. Over the past decade, however, income inequality in AEs and EMDEs has become increasingly unpredictable, reaching some of the highest levels recorded. While prior studies have explored this area, they have focused on either a broad sample of countries or numerous factors, rarely combining both aspects. This study analyses the impact of 8 macroeconomic factors on income inequality, proxied by the Gini Coefficient, in EMDEs and AEs from 2010 to 2021. It employs a Fixed Effects Model for the 24 EMDEs and Random Effects Model for the 31 AEs, thereby factoring in a total of 5280 observation points. The findings reveal that unemployment is the biggest driver of inequality in both EMDEs and AEs. It exerts a positive bearing at a significance level of less than 1%, exerting a more pronounced impact in EMDEs than AEs. Additionally, in EMDEs, fertility rate and economic growth significantly increase income inequality while financial development mitigates it. Conversely, economic growth has a negative influence on the Gini Coefficient in AEs. Contrary to expectations, traditional economic indicators like inflation, foreign Investment, and trade openness do not significantly impact income inequality in either group. Literacy, often believed to lower the Gini, is also statistically insignificant. The evolving and multifaceted nature of inequality underscores the need for this study - a more holistic approach to studying income inequality, considering factors beyond conventional economic metrics. This research provides valuable insights for policymakers and economists striving to address income inequality in EMDEs and AEs.