Explaining Income Inequality in Countries: An Integrated Approach

What can we say about systematic global and broad regional trends in the drivers of income inequality in countries? In order to address this question, this work takes an integrated approach in that it looks at a broad set of countries and examines a broad set of determinants. We thus model technological progress, non-resource trade flows, the education distribution, labor vs. capital income as well as heterogeneity in public social spending and analyze the relation to three income inequality measures in Advanced and Developing Economies. Our findings indicate the main factors adding to increasing inequality globally to be technological progress and trade with high-income countries. Trade with low-income countries, public spending on health and decreasing shares of people without any formal education, on the other hand, had significant equalizing effects on the income distribution. The estimated effects of the education distribution, public education spending and the labor income share are highly region specific and thus indicate the importance of disentangling global effects.