Income Inequality and Its Measures: Evidence from OECD and European Countries

Abstract

This paper is by nature an exploration study aimed to examine the measures of income inequality and is integrated with an empirical investigation of possible factors affecting the level of inequality. Recent data shows that the gap between poor and rich has been widening on an international scale. The way to solve this “sharing of created economic value” problem begins with the problem of how to measure inequality. Our literature review revealed different ways of measurement and how the concept of inequality was approached as well as it determines possible candidates for factors in empirical analysis. By making reference to De Maio’s findings (2007), most widely used methods of measurement are mentioned. A description of current situation in developed and developing economies based on most popular measure, which is Gini coefficient, is also provided.  Our empirical setting, to define factors influencing Gini coefficient, is employing data for 32 developed and developing OECD and EU countries in 2011 and 2012. We estimated an OLS model to the relation between Gini coefficients and several pre-identified regressors. We have found a linear relation with average income tax rate (taxrate) and with labor force participation rate (laborrate). The fact that public policies in taxation and labor force participation should be altered to cope with inequality is stressed in the paper.