The relationship between structural change and income inequality: Application of developed and developing countries

Structural change is defined as the long-run and continuous change that occurs in the sectoral composition of an economy. Structural change refers to changes in the sectoral composition of production, as well as social, political, cultural, social, and many other changes in countries. This study aims to reveal the effect of structural change that occurs differently in countries on income inequality. The Gini coefficient is used as an indicator of income inequality. The share of the industry, the share of the services, trade openness, urbanization, and the share of foreign direct investments in production are taken as indicators of structural change. In this study, panel data analysis is used to determine the effect of structural change on income inequality in 91 countries-regions covering the period 1988-2017. To determine the effect of structural change on income inequality, countries are divided into four according to income level. Therefore a three-stage empirical analysis is made for each group of countries. In the first stage of the empirical analysis, the stationarity levels of the variables are determined by using six different panel unit root tests. In the second stage, three cointegration tests are used to determine long-run relationships between the variables. In the third stage of the empirical analysis, the long-run coefficient estimation is made using the Fully Modified Ordinary Least Squares, Dynamic Ordinary Least Squares, and System Generalized Method of Moment. The results of the empirical analysis can be summarized as follows: i) In low-income countries, the rises in the share of industry and services sector and the rises in trade openness increase income inequality, besides the rises in foreign direct investments and the rises in urbanization reduce income inequality. ii) In lower-middle-income countries, it is found that increases in the share of the services sector, trade openness, and foreign direct investments reduce income inequality. iii) It is determined that the increases in the share of the industrial sector and the share of the services sector in upper-middle-income countries increase income inequality, while increases in foreign direct investments and urbanization reduce income inequality. iv) According to the findings obtained for high-income countries, the rises in the share of the services sector increase income inequality.