The relationship between income inequality and economic growth for EU countries : a GMM approach

Abstract

This study examines the relationship and the causal and dynamic link between economic growth and income inequality for EU countries, which were also grouped into Mediterranean countries, non-Mediterranean countries, rich countries, poorer countries and small states. The data is collected for 28 countries, ranging from 2009 to 2017. The main variables of interest were the GDP per capita and the Gini coefficient; however, the enrolment of tertiary education, the fertility rate, trade openness and the agricultural, industrial and services sectors, representing the labour force, were also utilised as determinants of the relationship between economic growth and income inequality. Using the Granger Causality test, results showed that there is a two-way relationship, and hence the dynamic-panel approach using a system GMM estimate was applied. This approach was applied for all samples, except for the small states sample. Since there are only four EU small states, the analysis for this sample was analysed using only graphical representation. The system GMM results revealed that a rise in income inequality, decreases economic growth for all samples. On the other hand, an increase in GDP per capita increases income inequality, except for poor EU countries, which exhibited a negative relationship. For all samples, the lagged Gini coefficient and GDP per capita had a high significant impact on the current Gini coefficient and GDP per capita, respectively. The significance and the impact of the other variables differed from one sample to another. Moreover, the results for the small states sample visually showed that there is a negative relationship between economic growth and income inequality.