A Panel Data Approach for Identification of Determinants of Income Inequality: The Role of Macroeconomic, Human Capital and Environmental Variables

Previous studies under the theme of income inequality have majorly focused upon the macroeconomic and human capital-based determinants. This paper attempts to identify and elaborate upon the effects of environmental variables, including pollution and climate change, in addition to the macroeconomic and human capital variables. The study analyses panel data from 49 countries for the period from 2010 to 2016. Amongst the methods of static analysis, a Fixed Effects Model is found to be most suitable. After controlling for heteroscedasticity and serial correlation using robust covariance matrix estimation, it is found that macroeconomic variables including foreign direct investment inflows, the proportion of elderly, inflation, and Gross Domestic Product per capita are significant. Air pollution is found to be a significant determinant of income inequality as well. A major objective of this study is to add to the limited literature on the impacts of environmental variables on income inequality.