Financialization and income inequality: An extreme bounds analysis

Abstract

Several theoretical hypotheses predict conflicting effects of financialization on income inequality, and the lack of consensus is reinforced by the mixed findings of related empirical studies. In this paper we address the model uncertainty issue by applying extreme bounds analysis (EBA) to examine the robustness of financialization variables as determinants of income inequality. The results suggest that financialization is a leading driver of income inequality and that the effects are larger when transmitted through financial markets. In addition, the results show that law and order, labour union density, population, globalization, remittances, education, and the agriculture sector share are also robust determinants of income inequality. Policy recommendations are put forward to reduce the power of the financial sector.