Inequality and Growth: A Time Series Perspective for the Group of Seven

Abstract

This thesis examines whether there is an empirical link between income inequality and technological progress in terms of total factor productivity (TFP) using time series data from 1950 to 2014. For setting trends in a global context, this investigation will focus on the world’s most industrialized economies, which are in that case the Group-of-Seven, namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Using the cointegration methodology including the error correction estimation of Engle and Granger (1987), cointegrating relationships among the three models (i) top 10% income share and TFP, (ii) top 5% income share and TFP, and (iii) top 1% income share and TFP are established. The empirical findings of this thesis are various, since there are different circumstances for each state. Ensuing from the question whether changes in income inequality are caused by technological progress, there is a partially evidence of TFP altering the top end of the income distribution. Taken as a whole, this thesis proves that technological progress has a statistical impact on income inequality in Canada, Italy, the United Kingdom and partly in the United States. The findings in France and Germany demonstrate a weak effect of TFP on income inequality. In the case of Japan, there is no feasibility in investigating the relationship between income inequality and economic growth using the Engle-Granger approach, since the variable of TFP is not accomplishing the necessary requirement of being integrated of order one, I(1).