The impact of finance and political ideology on income inequality: empirical analyses

Abstract

In order to better understand how finance causes income inequality and to comprehend the ontology of this relationship, I started the ‘minor’ part of this thesis with the fundamental assumption that the knowledge sphere exists independently of our knowledge and regardless of personal subjective experience. The overall (minor plus major) objective of this thesis is to gain a better understanding of the relationship between finance and income inequality. To achieve this objective, I examine both the theoretical and a large empirical literature on the subject. At the level of theory, the thesis combines the orthodox and heterodox mechanisms through which finance generates income inequality in modern capitalist countries. Empirically, the thesis develops a Dynamic Panel Autoregressive Distributed Lag (ARDL) model that controls for indicators of globalization, rising monopoly power, business cycles, and other variables in an attempt to isolate the unbiased causal effects of financial variables on income inequality. I estimate the ARDL model against two-panel datasets. I use the first dataset (48 countries from 1993 to 2017) to study how financial development, financial liberalization, and financial structure affect the Gini- measure income inequality across high, middle, and low-income countries. I employ the second dataset (14 OECD countries from 1980 to 2017) to study the long-run effects of financialization and neoliberalism on several alternative measures of income inequality across countries classified as neoliberal (the United States, the United Kingdom, Canada, and Australia); Nordic (Denmark, Finland, Sweden, and Norway) and social-corporatist (France and Germany). The primary finding of this research is that financial indicator variables exert a significant effect on income inequality in the long run across high, middle, and low-income countries. Second, countries with a more market-based financial structure promote more equitable income distribution, while countries with faster growth tend to generate greater income disparity. Third, increased trade openness leads to increased income disparity, while lower competition helps to reduce inequality. Our evidence does not support the inverted “U-shape” theory1 concerning financial development and income inequality. Finally, neoliberalism and financialization have increased disposable income disparity in the upper-tail and the lower-tail of income distribution within countries.