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Long-run dynamics between trade liberalization and income inequality in the European Union: a second generation approach

Abstract

The surprisingly limited literature investigating whether there exists a long-run association between trade liberalization and income inequality finds strong evidence for it. We point out a possible model misspecification due to ignoring the presence of cross-section dependence. Using a panel of 15 EU countries in the 1985–2017 period we show that there is strong evidence for the presence of cross-section dependence. Therefore, we use so-called second-generation procedures (which are robust to cross-section dependence) and find no evidence that trade liberalization and income inequality share a long-run cointegrating relationship in the European Union.

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Notes

  1. Squalli and Wilson (2011) define an open economy as one which exhibits (1) a relatively high share of trade relative to overal economic activity and (2) an important level of interaction and interconnectedness with the rest of the world. They constructed the composite trade share index as a measure, which captures these two dimensions of trade openness.

  2. The links between education and income inequality have been investigated theoretically (see Glomm and Ravikumar (2003)) and empirically (see Sylwester (2000) and Sylwester (2002)).

  3. Kawachi and Kennedy (1997), Vogli et al. (2005), and Babones (2008) study the dynamics between life expectancy and income inequality.

  4. The assumption of strict exogeneity is not a necessary condition for the panel cointegration test we employ in Sect. 4.4. Westerlund (2007) notes that weak exogeneity is sufficient. See the paper for more information.

  5. We note that the evidence for cross-section dependence in the disposable income inequality panel is not as strong as other variables as the null of no cross-section depedendence is only rejected at the 10% significance level (vs 1% for other variables).

  6. For empirical studies on how good governance reduces income inequality, see Shen and Yao (2008) and Chong and Gradstein (2007).

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Correspondence to Ghislain Nono Gueye.

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Akyuz, M., Gueye, G.N. & Karul, C. Long-run dynamics between trade liberalization and income inequality in the European Union: a second generation approach. Empirica (2022). https://doi.org/10.1007/s10663-022-09539-8

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  • DOI: https://doi.org/10.1007/s10663-022-09539-8

Keywords

  • Trade liberalization
  • Income inequality
  • Panel cointegration
  • Cross-section dependence
  • European Union

JEL Classification

  • F02
  • F15
  • F16