Cover of EconPol Policy Report 18

Structural Reforms and Income Inequality: Who Benefits From Market-Oriented Reforms?

Klaus Gründler (EconPol Europe, ifo Institute, LMU Munich), Niklas Potrafke (EconPol Europe, ifo Institute, LMU Munich), Timo Wochner (LMU Munich)

Do structural reforms benefit individual groups? Klaus Gründler (EconPol Europe, ifo Institute, LMU Munich), Niklas Potrafke (EconPol Europe, ifo Institute, LMU Munich) and Timo Wochner (LMU Munich) employed macro and micro data to investigate whether the income of low-income citizens increased to a smaller extent than the income of high-income citizens. The results suggest not: market oriented reforms were positively correlated with income shares of low-income citizens, and low-income citizens are less likely to support market-oriented reforms than high-income citizens. It is conceivable that low income citizens have misperceptions about how they benefit from market-oriented reforms.

Abstract

We examine how structural reforms relate to income inequality. We employ many indicators of structural reforms and use data for market and net income inequality. The dataset includes up to 135 countries since 1960. The results do not suggest that market-oriented structural reforms were associated with rising income inequality in the full sample. Trade and financial liberalization were positively associated with income inequality in high-income countries. An important question is whether structural reforms benefit individual groups. We employ macro and micro data to investigate whether the income of low-income citizens increased to a smaller extent than the income of high-income citizens. The results suggest quite the opposite: marketoriented reforms were positively correlated with income shares of low-income citizens. We also examine citizens’ support for structural reforms and show that low-income citizens are less likely to support market-oriented reforms than high-income citizens. It is conceivable that low income citizens have misperceptions about how they benefit from market-oriented reforms.

Citation

Klaus Gründler, Niklas Potrafke, Timo Wochner: Structural Reforms and Income Inequality: Who Benefits From Market- Oriented Reforms?, EconPol Policy Report 18, December 2019