Macro-determinants of income inequality: An empirical analysis in case of India

Abstract

In this paper, we have used ARDL cointegration approach to analyse the relationship between income inequality and its various determinants for the period 1963 to 2007. Besides data on Estimated Household Income Inequality (EHII), we have used income share of top 1% of the population as an alternative measure of inequality. The results reveal that while real GDP per capita is negatively associated with overall inequality, it has a positive impact on the income share of the top 1%. The estimates for government expenditure and trade openness reveal that they have a significant positive impact in improving the distribution of income in the long run. For both the models, the results showed that increase in the price level leads to increase in inequality. Moreover, the estimates for the share of agriculture in the total GDP indicate that an increase in its proportion leads to an improvement in the distribution of income.