Income inequality-labor productivity relationship: CS-ARDL approach


Wage inequality
labor productivity
sustainable development
panel analysis

How to Cite

Bağlıtaş, H. (2021). Income inequality-labor productivity relationship: CS-ARDL approach. JOURNAL OF APPLIED MICROECONOMETRICS, 1(2), 101-111.


With the acceleration of globalization, “Reducing Inequalities”, which is the 10th of the sustainable development goals, has started to attract more attention in the world. Many factors lead to inequality. Therefore, inequality requires consensus and strength at the interdisciplinary, local, national, and international levels. The leading indicator of inequality is income inequality. Its measurability and widespread impact are sources of its importance and priority. Unfair income distribution might have unfavorable effects on employees such as being more reluctant to work and the well-being of workers. In addition, if workers believe they earn less than they deserve, this might negatively affect the labor productivity. Ultimately, this process may cause countries to reduce their production output.

This study aims to explore the link between income inequality and labor productivity among 31 countries in Europe with the period of 2005-2019. To do this, a cross-sectional auto-regressive distributed lag model (CS-ARDL) is employed. According to the results, wage inequality damages the productivity of labor. A 1% increase in the wage inequality reduces labor productivity by 0.16%. Moreover, the unequal income distribution has an explanatory power of approximately 33% on the decrease in productivity. This helps to determine the possible effects of the unequal income distribution leading towards two targets. These targets are to create an efficient wage structure and eliminate the destructive effects of inequality, respectively. In terms of the policy effectiveness, simultaneous application of tools may be more beneficial.


AFONSO, H., LAFLEUR, M. and ALARCÓN, D. (2015). Concepts of Inequality: Development Issues No. 1. Development Strategy and Policy Analysis Unit in Development Policy and Analysis Division, New York, USA.

AGHION, P., BACCHETTA, P., RANCIERE, R., and ROGOFF, K. (2009). Exchange rate volatility and productivity growth: The role of financial development. Journal of monetary economics, 56(4), 494-513.

AKERLOF, G. A. (1984). Gift Exchange and Efficiency-Wage Theory: Four Views, American Economic Review, 74, 79-83

AKERLOF, G. A. and YELLEN, J. L. (1990). The fair wage-effort hypothesis and unemployment. The Quarterly Journal of Economics, 105(2), 255-283.

BASRIL, N. M., KARIM, Z. A., ISMAIL, R., and SULAIMAN, N. (2018). The Effect of Wages and Industry-Specific Variables on Productivity of Manufacturing Industry in Malaysia: A Dynamic Heterogeneous Panel Evidence. International Journal of Economics & Management, 12(2), 379-391.

BRITTON, J. and PROPPER, C. (2016). Teachers pay and school productivity: Exploiting wage regulation, Journal of Public Economics. 133(2016), 75-89.

BRUNDTLAND COMMISSION. (1987). Our Common Future, Chapter 2: Towards Sustainable Development. World Commission on Environment and Development (WCED). Geneva: United Nation.

CAROLI, E. and VAN REENEN, J. (2001). Skill-biased organizational change? Evidence from a panel of British and French establishments. The Quarterly Journal of Economics, 116(4), 1449-1492.

CHOUDHRY, M. T. (2009). 1 Determinants of Labor Productivity: An Empirical Investigation of Productivity Divergence.

CHUDIK, A., MOHADDES, K., PESARAN, M. H., and RAISSI, M. (2016). Long-run effects in large heterogeneous panel data models with cross-sectionally correlated errors. Essays in Honor of man Ullah (Advances in Econometrics, Vol. 36), Emerald Group Publishing Limited, Bingley, 85-135.

COHN, A., FEHR, E., and GOETTE, L. (2015). Fair wages and effort provision: Combining evidence from a choice experiment and a field experiment. Management Science, 61(8), 1777-1794.

DA SILVEIRA, J.J. and LIMA, G.T. (2021). Wage inequality as a source of endogenous macroeconomic fluctuations, Structural Change and Economic Dynamics. 56(2021), 35-52.

DE HOYOS, R. E. and SARAFIDIS, V. (2006). Testing for cross-sectional dependence in panel-data models. The Stata Journal, 6(4), 482-496.

DIPIETRO, R. (2014). Productivity growth and income inequality. Journal of Economics and Development Studies, 2(3), 01-08.

DITZEN, J. (2018). Estimating long run effects in models with cross-sectional dependence using xtdcce2. Centre for Energy Economics Research and Policy (CEERP), Working Paper No. 7.

ERÜLGEN, A., RJOUB, H. and ADALIER, A. (2020). Bank Characteristics Effect on Capital Structure: Evidence from PMG and CS-ARDL. Journal of Risk and Financial Management, 13(12), 1-13.

ESPOIR, D. K. and NGEPAH, N. (2021). The effects of inequality on total factor productivity across districts in South Africa: a spatial econometric analysis. GeoJournal, 86(6), 2607-2638.

EUROSTAT, (2021). Products Datasets: Inequality of income distribution S80/S20 income quintile share ratio - EU-SILC and ECHP surveys,, [Date Accessed: 30/04/2021].

EUROSTAT (2021). Products Datasets: Labour productivity per person employed and hour worked (EU27_2020=100),, [Date Accessed: 30/04/2021].

EZCURRA, R., PASCUAL, P. and RAPÚN, M. (2007). Spatial inequality in productivity in the European union: sectoral and regional factors. International Regional Science Review, 30(4), 384-407.

FELDSTEIN, M. (2008). Did wages reflect growth in productivity? Journal of Policy Modeling, 30(4), 591-594.

FREEMAN, R.B., and MEDOFF, J. L. (1984). What Do Unions Do? New York: Basic Books

FREES, E. W. (1995). Assessing cross-sectional correlation in panel data. Journal of Econometrics, 69, 393–414.

FRIEDMAN, M. (1937). The use of ranks to avoid the assumption of normality implicit in the analysis of variance. Journal of the American Statistical Association, 32, 675–701.

FUENTES, R., MISHRA, T., SCAVIA, J., and PARHI, M. (2014). On optimal long-term relationship between TFP, institutions, and income inequality under embodied technical progress. Structural Change and Economic Dynamics, 31, 89-100.

GRANGER, C. J. (1986). Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics, 48(3), 213-228

GRIES, T. and NAUDÉ, W. (2018). Artificial intelligence, jobs, inequality, and productivity: Does aggregate demand matter? Discussion Paper Series IZA DP No. 12005

HE, C., ZHOU, Y. and ZHU, S. (2017). Firm dynamics, institutional context, and regional inequality of productivity in China. Geographical Review, 107(2), 296-316.

HERMAN, E. (2020). Labour Productivity and Wages in the Romanian Manufacturing Sector, Procedia Manufacturing. 46(2020), 313-321.

HIBBS Jr, D.A. and LOCKING, H. (2000). Wage dispersion and productive efficiency: Evidence for Sweden. Journal of Labor Economics, 18(4), 755-782.

HORNBECK, R., and MORETTI, E. (2018). Who benefits from productivity growth? Direct and indirect effects of local TFP growth on wages, rents, and inequality. National Bureau of Economic Research. Working Papers No. w24661.

ISAKSSON, A., and NG, T. H. (2006). Determinants of productivity: cross-country analysis and country case studies. Research and Statistics Branch, UNIDO.

ISAKSSON, A. (2007). Determinants of total factor productivity: a literature review. Research and Statistics Branch, UNIDO.

ISLAM, N. (2008). Determinants of productivity across countries: an exploratory analysis. The Journal of Developing Areas, 201-242.

KAMPELMANN, S., and RYCX, F. (2012). Are occupations paid what they are worth? An econometric study of occupational wage inequality and productivity. De Economist, 160(3), 257-287.

KATZ, L.F. (1986). Efficiency wage theories: A partial evaluation. NBER macroeconomics annual, Working Papers Series No 1, 235-276.

KHAN, M., LUINTEL, K. B., and THEODORIDIS, K. (2011). How robust is the R&D-productivity relationship? Evidence from OECD countries. Economic Research Working Paper, (Vol. 1). WIPO.

KIM, C., and SAKAMOTO, A. (2008). Does inequality increase productivity? Evidence from US manufacturing industries, 1979 to 1996. Work and Occupations, 35(1), 85-114.

KOÇBULUT, Ö. and ALTINTAŞ, H. (2016). İkiz açıklar ve Feldstein-Horioka Hipotezi: OECD ülkeleri üzerine yatay kesit bağımlılığı altında yapısal kırılmalı panel eşbütünleşme analizi. Erciyes Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, (48), 145-174.

KOSE, M. A., PRASAD, E. S., and TERRONES, M. E. (2009). Does openness to international financial flows raise productivity growth? Journal of International Money and Finance, 28(4), 554-580.

KRUGMAN, P. (1994). Defining and measuring productivity, Organisation for Economic Co-operation, and Development website,, [Date Accessed: 23/11/2021].

LEVINE, D.I. (1989). Cohesiveness, productivity, and wage dispersion. Journal of Economic Behavior & Organization, 15(2), 237-255.

LEVINE, D.I. (1992). Can wage increases pay for themselves? Tests with a productive function. The Economic Journal, 102(414), 1102-1115.

LEUNG, C.K.Y. (2001). Productivity growth, increasing income inequality and social insurance: the case of China? Journal of Economic Behavior & Organization, 46(4), 395-408.

LOKO, M.B., and DIOUF, M. A. (2009). Revisiting the Determinants of Productivity Growth-What’s new? International Monetary Fund.

LIU, J. (2002). Does wage inequality affect labor productivity? Some evidence from manufacturing industries of Taiwan and South Korea, Asia Pacific Management Review, 7(4), 449-76.

MAHY, B., RYCX, F., and VOLRAL, M. (2011). Wage dispersion and firm productivity in different working environments. British Journal of Industrial Relations, 49(3), 460-485.

MAOZ, Y.D., and SARID, A. (2021). Sectoral Heterogeneity, Income Inequality and Productivity Dynamics. The Journal of Income Distribution.

MEAGER, N., and SPECKESSER, S. (2011). Wages, productivity, and employment: A review of theory and international data. European Employment Observatory Thematic expert ad-hoc paper, Institute for Employment Studies 1, 1-73.

MEIDNER, R. and REHN, G. (1952). Wages Policy under Full Employment. London: William Hodge; 1st Edition.

PAUL, P. (2020, March). Historical patterns of inequality and productivity around financial crises. Federal Reserve Bank of San Francisco Working Papers.

PESARAN, M.H. (2004). General diagnostic tests for cross section dependence in panels. University of Cambridge, Cambridge Working Papers in Economics, No. 0435.

PESARAN, M.H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of Applied Econometrics, 22(2), 265-312.

PESARAN, M.H., SHIN, Y., and SMITH, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.

POLICARDO, L., PUNZO, L. F. and CARRERA, E.J.S. (2018). Wage inequality and labor productivity in OECD countries, Texto Para Discussão Discussion Paper, 136(2018).

REBITZER, J.B. (1987). Unemployment, long-term employment relations, and productivity growth. The Review of Economics and Statistics, 69(4), 627-635.

SPITZ, J. (1989). An Empirical Test Efficiency Wage Theory. Graduate School of Business, Stanford University. Working Paper No. 1053.

STANSBURY, A.M., & SUMMERS, L.H. (2018). Productivity and Pay: Is the link broken? (No. w24165). National Bureau of Economic Research. Working Paper Series No.24165.

STIGLITZ, J.E. (1982). Alternative Theories of Wage Determination and Unemployment: The Efficient Wage Model. in The Theory and Experience of Economic Development. Eds. M. Gersovitz, C. F. Diaz-Alekandro, G. Ranis and M. R. Rosenzweig. pp. 78-106, London: George Allen & Unwin Ltd., First Edition, ISBN: 0-04-330323-4.

STIGLITZ, J.E. (2013). The Price of Inequality: How Today’s Divided Society. W.W. New York: Norton, First Edition, ISBN: 978-0-393-08869-4.

THE GLOBAL GOALS,, [Date Accessed: 23/11/2021].

TRPESKI, P., EFTIMOV, L., and CVETANOSKA, M. (2016). Labor productivity and real wages in Macedonia: An overview before and after the global economic crisis. European Scientific Journal. 12 (10), p.352-365.

ZHANG, J. and LIU, X. (2013). The evolving pattern of the wage–labor productivity nexus in China: Evidence from manufacturing firm-level data, Economic Systems, 37(2013), 354-36

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Copyright (c) 2021 Jolistence Publications


Download data is not yet available.