Global Trends and Local Divides: Investigating the Impact of Economic and Social Dynamics on Income Disparities in the Era of Globalization

Abstract

Economic and social structure along with globalization influence income inequalities. In this era of globalization, all economies are interconnected, and their economic and social disparities generate more unequal income distribution. This study was planned to explore the determinants of income inequality within a single framework and test their causality based on a panel of 58 economies over the time period of 2005 to 2021. For this purpose, different econometric approaches (fixed effect, random effect, cross-sectional feasible generalized least square, and system GMM) were applied to get robust estimations. The findings revealed that two economic indicators, economic growth and government final consumption expenditures significantly reduced income inequalities. Among the different dimensions of globalization, only economic and social globalization have a significant negative impact on income inequalities. The social structure dynamics including institutional quality, had a negative role in income inequality, while urbanization increased income inequalities. The Dumitrescu and Hurlin causality tests revealed the bidirectional causality between income inequality and all other variables under consideration except foreign direct investment. Therefore, the economies must promote inclusive growth that provides widespread employment opportunities for marginalized individuals in society, support small and medium enterprises, enhance public benefit-orientated government expenditures, develop effective governance frameworks in order to control corruption and protect property rights, implement fair trade practices, and retrain the workers affected by globalization to lower income inequalities.