Robust determinants of income inequality

Abstract

While economic theory suggests a wide range of potential determinants of income inequality, there is little consensus regarding the most relevant ones. Such a lack of consensus reflects, to an important extent, the impact of model uncertainty. Using model-averaging techniques—specifically WALS (weighted-average least squares)—to get at a robust set of determinants, our results underscore the multiplicity of factors behind rising national-level inequalities. In the cross-section, the level of development and demographics, as well as unemployment and globalization, seem to be key drivers. Trade and financial globalization have asymmetric effects, with trade integration associated with lower inequality, and financial globalization with higher inequality. Financial deregulation and technological change seem to be important drivers of inequality, particularly in advanced economies.