Income inequality and polity – an empirical analysis of political Kuznets curve

Abstract

PurposeFaced with contradictory outcomes in empirical studies on the relation between democracy and income inequality, this paper attempts to provide empirical relations between democracy and income inequality. In particular, the authors seek to find if any curvilinear relation exists as in the Kuznets hypothesis.Design/methodology/approachGiven elusiveness in empirical relations, the authors will consider several specifications using different estimation methods such as ordinary least squares (OLS), panel data estimation and performing statistical tests to determine the best specification for the relation between income inequality and democracy. Once the authors choose the specification, then the authors will apply this specification to the different groups of data to find any meaningful implications.FindingsUsing the unbalanced panel of 136 countries spanning from 1980 to 2018, the authors found an inverse U-shaped relation, called a political Kuznets curve – income inequality increases first and then decreases later as more democracy is achieved. By quantifying the curve, the authors find that the direct impact of democracy on income inequality is small and that the incremental impact of democracy on income inequality is smaller in a semi-democracy while relatively larger in a full democracy and autocracy.Originality/valueFrom the study’s findings, the following policy implications can be considered. First, any change in income inequality caused by democratization should not be concerning as the impact of democracy on income inequality is measured to be very small. Second, the largest factor reducing income inequality is real GDP per capita. Third, the authors find that an impact of government expenditure on income inequality is also inversely U-shaped.