Skip to main content

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.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11
Fig. 12
Fig. 13
Fig. 14

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).

References

  • Andrews DWK (2005) Cross-section regression with common shocks. Econometrica 73(5):1551–85

    Article  Google Scholar 

  • Asteriou D, Dimelis S, Moudatsou A (2014) Globalization and income inequality: a panel data econometric approach for the Eu27 countries. Econ Model 36:592–99

    Article  Google Scholar 

  • Babones SJ (2008) Income inequality and population health: correlation and causality. Social Sci Med 66(7):1614–26

    Article  Google Scholar 

  • Bahmani-Oskooee M, Hegerty SW, Wilmeth H (2008) Short-run and long-run determinants of income inequality: evidence from 16 countries. J Post Keynes Econ 30(3):463–84

    Article  Google Scholar 

  • Balassa B (1976) Types of economic integration. In: Economic integration: worldwide, regional, sectoral. 17–40. Springer

  • Baldwin RE, Charles W (2006) The economics of European integration. McGraw-Hill Education Berkshire

    Google Scholar 

  • Baltagi Badi H, Hashem PM (2007) Heterogeneity and cross section dependence in panel data models: theory and applications introduction. J Appl Econ 22(2):229–32

    Article  Google Scholar 

  • Banerjee A, Marcellino M, Osbat C (2005) Testing for PPP: should we use panel methods? Empirical Econ 30(1):77–91

    Article  Google Scholar 

  • Barusman AF, Barusman YS (2017) The impact of international trade on income inequality in the united states since 1970’s. Eur Res Stud J 20(4A):35–50

    Google Scholar 

  • Basak GK, Das S (2017) Intercept homogeneity test for fixed effect models under cross-sectional dependence: some insights. J Econ Methods. https://doi.org/10.1515/jem-2015-0004

    Article  Google Scholar 

  • Bergh A, Nilsson T (2010) Do liberalization and globalization increase income inequality? Eur J Polit Econ 26(4):488–505

    Article  Google Scholar 

  • Bogliaccini JA (2013) Trade liberalization, deindustrialization, and inequality: evidence from middle-income latin American countries. Latin Am Res Rev 48:79–105

    Article  Google Scholar 

  • Bogliacino F (2014) Inequality and Europe 2020. Intereconomics 49(5):288–94

    Article  Google Scholar 

  • Breusch TS, Pagan AR (1980) The lagrange multiplier test and its applications to model specification in econometrics. Rev Econ Stud 47(1):239–53

    Article  Google Scholar 

  • Brown DK, Stern RM et al (2009) Computable general equilibrium estimates of the gains from US-Canadian trade liberalization. Glob Int Trade Polic 9:425

    Google Scholar 

  • Cassette A, Fleury N, Petit S (2012) Income inequalities and international trade in goods and services: short-and long-run evidence. Int Trade J 26(3):223–54

    Article  Google Scholar 

  • Chamberlain G (1984) Panel data. Handb Econ 2:1247–1318

    Google Scholar 

  • Chong A, Gradstein M (2007) Inequality and institutions. Rev Econ Stat 89(3):454–65

    Article  Google Scholar 

  • Chudik A, Pesaran MH (2013) Large panel data models with cross-sectional dependence: a survey. CAFE Research Paper. 13:15

  • Chudik A, Pesaran MH (2015) Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. J Econ 188(2):393–420

    Article  Google Scholar 

  • Cohn Theodore H (2016) Global political economy: theory and practice. Routledge

    Book  Google Scholar 

  • De Loecker D (2011) Product differentiation, multiproduct firms, and estimating the impact of trade liberalization on productivity. Econometrica 79(5):1407–51

    Article  Google Scholar 

  • De Vogli D, Roberto RM, Gnesotto R, Cornia GA (2005) Has the relation between income inequality and life expectancy disappeared? Evidence from Italy and top industrialised countries. J Epidemiol Commun Health 59(2):158–62

    Article  Google Scholar 

  • Dreher A (2006) Does globalization affect growth? Evidence from a new index of globalization. Appl Econ 38(10):1091–1110

    Article  Google Scholar 

  • Elveren AY, Örnek İ, Akel G (2012) Internationalisation, growth and pay inequality: a cointegration analysis for Turkey, 1970–2007. Int Rev Appl Econ 26(5):579–95

    Article  Google Scholar 

  • Eurostat statistical (2008) External and intra-European union trade. Monthly Statistics-Issue. no. 2

  • Glomm G, Ravikumar B (2003) Public education and income inequality. Eur J Polit Econ 19(2):289–300

    Article  Google Scholar 

  • Im KS, Hashem Pesaran M, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econ 115(1):53–74

    Article  Google Scholar 

  • Imbruno M (2020) A micro-founded approach to exploring gains from trade integration: evidence from 27 EU countries. World Econ 44:706

    Article  Google Scholar 

  • Jaumotte F, Lall S, Papageorgiou C (2013) Rising income inequality: technology, or trade and financial globalization? IMF Econ Rev 61(2):271–309

    Article  Google Scholar 

  • Kao C (1999) Spurious regression and residual-based tests for cointegration in panel data. J Econ 90(1):1–44

    Article  Google Scholar 

  • Kawachi I, Kennedy BP (1997) The relationship of income inequality to mortality: does the choice of indicator matter? Social Sci Med 45(7):1121–27

    Article  Google Scholar 

  • Levin A, Lin C-F, Chu C-SJ (2002) Unit root tests in panel data: asymptotic and finite-sample properties. J Econ 108(1):1–24

    Article  Google Scholar 

  • Lim GC, Paul D McNelis (2014) Income inequality, trade and financial openness. New Perspectives

  • Meschi E, Vivarelli M (2009) Trade and income inequality in developing countries. World Dev 37(2):287–302

    Article  Google Scholar 

  • Milanovic B, Squire L (2007) 4 Does tariff liberalization increase wage inequality? University of Chicago Press,

    Google Scholar 

  • Morley SA, Machado R, Pettinato S (1999) Indexes of structural reform in Latin America. United Nations, Economic Comm. for Latin America; the Caribbean

  • Neagu O, Dumiter F, Braica A (2016) Inequality, economic growth and trade openness: a case study for central and eastern European countries (ECE). Amfiteatru Econ J 18(43):557–74

    Google Scholar 

  • Olley GS, Ariel P (1992) The dynamics of productivity in the telecommunications equipment industry. National Bureau of Economic Research

  • Pavcnik N (2002) Trade liberalization, exit, and productivity improvements: evidence from Chilean plants. Rev Econ Stud 69(1):245–76

    Article  Google Scholar 

  • Pedroni P (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bull Econ Stat 61(S1):653–70

    Article  Google Scholar 

  • Pesaran MH (2004) General diagnostic tests for cross section dependence in panels

  • Pesaran MH (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Economet 22(2):265–312

    Article  Google Scholar 

  • Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Economet 16(3):289–326

    Article  Google Scholar 

  • Phillips PCB, Donggyu S (2003) The elusive empirical shadow of growth convergence

  • Phillips PCB, Sul D (2007) Bias in dynamic panel estimation with fixed effects, incidental trends and cross section dependence. J Econ 137(1):162–88

    Article  Google Scholar 

  • Ray S (2012) Globalization and economic growth in India: a granger causality approach. JL Pol’y Glob 2:18

    Google Scholar 

  • Reuveny R, Li Q (2003) Economic openness, democracy, and income inequality: an empirical analysis. Comp Pol Stud 36(5):575–601

    Article  Google Scholar 

  • Sarafidis V, Robertson D (2009) On the impact of error cross-sectional dependence in short dynamic panel estimation. Economet J 12(1):62–81

    Article  Google Scholar 

  • Shen Y, Yao Y (2008) Does grassroots democracy reduce income inequality in China? J Public Econ 92(10–11):2182–98

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1993) Corruption. Q J Econ 108(3):599–617

    Article  Google Scholar 

  • Smarzynska JB (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. Am Econ Rev 94(3):605–27

    Article  Google Scholar 

  • Solt F (2016) The standardized world income inequality database. Soc Sci Q 97(5):1267–81

    Article  Google Scholar 

  • Solt F (2018) The standardized world income inequality database. Harvard Dataverse

  • Squalli J, Wilson K (2011) A new measure of trade openness. World Econ 34(10):1745–70

    Article  Google Scholar 

  • Sun P, Tan Y, Yang G (2020) Export, FDI and the welfare gains from trade liberalization. Econ Modell 92:230

    Article  Google Scholar 

  • Sylwester K (2000) Income inequality, education expenditures, and growth. J Dev Econ 63(2):379–98

    Article  Google Scholar 

  • Sylwester K (2002) Can education expenditures reduce income inequality? Econ Educ Rev 21(1):43–52

    Article  Google Scholar 

  • Székely M, Claudia S (2012) Did trade openness affect income distribution in Latin America? Evidence for the years 1980-2010

  • Tang H (2014) World trade report 2013-Factors shaping the future of world tradeworld trade organization, 2013. World Trade Rev 13(4):733–35

    Article  Google Scholar 

  • Taylor AM (2002) Globalization, trade, and development: some lessons from history. Natl Bureau Econ Res

  • Tridico P (2018) The determinants of income inequality in OECD countries. Camb J Econ 42(4):1009–42

    Article  Google Scholar 

  • Tybout JR, Westbrook MD (1995) Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries. J Int Econ 39(1–2):53–78

    Article  Google Scholar 

  • Van Biesebroeck J (2005) Exporting raises productivity in sub-Saharan African manufacturing firms. J Int Econ 67(2):373–91

    Article  Google Scholar 

  • Westerlund J (2007) Testing for error correction in panel data. Oxford Bull Econ Stat 69(6):709–48

    Article  Google Scholar 

  • World Bank (2020) Worldwide Governance Indicators. www.govindicators.org

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Ghislain Nono Gueye.

Additional information

Responsible Editor: Jesus Crespo Cuaresma.

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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 49, 769–792 (2022). https://doi.org/10.1007/s10663-022-09539-8

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • 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