Income distribution and total factor productivity: a cross-country panel cointegration analysis

This study investigates the relationship between income inequality and total factor productivity (TFP) across countries for a period covering the years 1990 to 2014. The research objective is to empirically assess the skill-biased technological change argument which supports the increasing income/wage inequality that has boosted productivity in recent decades. To achieve this objective, we utilized panel cointegration tests and a fully modified OLS and rolling window OLS regression. The findings show that income inequality significantly deters TFP in the long-term in developing countries. We found no evidence that income inequality affects TFP in the long-term in developed countries. These findings suggest that developing countries that are experiencing prolonged periods of rising income inequality are more exposed to: (i) low productivity and growth, (ii) a high risk of increase in the extreme poverty rate.