Inequality and economic growth worldwide and by groups of countries based on their income level, with cointegration techniques

Abstract

This research aims to examine the existence of a short- and long-term balance between income inequality and gross domestic product per capita worldwide and by groups of countries according to income level in the period 1980-2015, with data obtained from the World Bank (2010). The Pedroni (1999) and Westerlund (2007) cointegration tests have been applied to determine the equilibrium in the long and short term, respectively. At the global level and in all groups of countries, there is a long-term relationship between income inequality and gross domestic product per capita, and in most countries the strength of the cointegration vector is strong. According to the Westerlund (2007) test, there is a short-term relationship between the variables, at a global level, extremely high, high, medium-high, low, and extremely low-income countries. The results of the Granger causality test based on the Dumitrescu and Hurlin (2012) test indicate that, globally, in upper-middle-income and low-income countries there is one-way causality, ranging from per capita gross domestic product to income inequality. Based on these results, policies such as an increase in income tax, investment in education and job creation can be applied, in order for families to improve their economy, thus reducing income inequality.