Inequality Thresholds, Institutional Quality and Employment in Central and Eastern European Countries (CEECs)

Abstract

This study investigates the dynamic relationship between institutional quality, income inequality and employment level in 19 Central and Eastern European countries during the period 2004–2015. Three indicators of institutional quality and three indicators of income inequality were used to examine this relationship. The institutional quality indicators used include corporate governance, economic governance and political governance indices while the income inequality indicators include the Gini coefficient, the Atkinson index and the Palma ratio. In the study, in which the Generalized Method of Moments (GMM) estimation technique was employed, it was found that an increase in institutional quality unconditionally results in an increase in employment level. The income inequality threshold levels that should not be exceeded in order to maintain the positive effect of institutional quality on employment level were calculated. Furthermore, it has been determined that inequality thresholds depend on the institutional quality and income inequality indicator used. Specifically, in the study, it was determined that for institutional quality to have a sustained positive impact on employment, i) the Palma ratio in the corporate governance specification should not exceed 0.875; ii) the Atkinson index in the economic governance specification should not exceed 0.311; and iii) the Atkinson index and Palma ratio shSould not exceed 0.258 and 1.333, respectively, in the political governance specification. Jel Classifications: E24, C23