Skill versus Inequality

Abstract

This paper explores empirical evidence for a connection between income inequality and skill (advanced-level educated workers share) using panel data methods that take into account cross-section dependency and heterogeneity. To assess the income inequality associated with skill, we run a data set for 24 developed the Organisation for Economic Co-operation and Development (OECD) countries from 1995 to 2018. In order to determine the stationary characteristics of the variables, we employ the Cross-Sectionally Augmented Im, Pe- saran and Shin (CIPS) test approach. Following this, we employ Westerlund (2007), and Gengenbach, Urbain, and Westerlund (2016) Panel Cointegration tests, and then the Panel Dynamic Ordinary Least Squares (PDOLS) estimator. Our empirical test results conclude that there is a relationship between inequality and skill in the long-run and the PDOLS estimator findings show that as the skill level in employment increases, inequality decreases. In addition, according to the findings, this negative relationship is more pronounced in the United States, whereas it is more moderate or not valid in European countries. The results obtained are primarily consistent with the framework presented by Acemoglu (2002, 2003). These findings constitute one of the main contributions of the study in terms of supporting Acemoglu's (2003) thesis that the skill premium is more pronounced in the United States.