Income distribution and its determinants in the Republic of Macedonia

Abstract

Income inequality, which is the unequal distribution of income is an important issue within the study of economic development. The economic theories on the income distribution consist of many potential factors by which income inequality can be influenced, with а minor point on a selection of suitable determinants to include in Gini coefficient regression model. Past studies remain divided about this issue, where some find there to be a positive relationship and others support a negative relationship between income inequality and the factors that determinate it. Recent researches and analysis show that income inequality in Macedonia has increased in recent years. Therefore, the level of inequality in the distribution of wages in Macedonia in 2008 as a year when the economic crisis started in the last quarter, in 2012 as the year in which GDP still has had a negative rate of economic growth, in 2014, when the economy maintained positive economic growth and in 2016 as a year with last available annual data will be discussed. The purpose and the aim of this study is to bring forward the major macroeconomic determinants that affect the income inequality in Macedonia, taking into account the specific characteristics of the country. The primary papers which investigate the determinants of income inequality analyze the effect of economic growth on income inequality. So, we will use real GDP growth as one of explanatory variable and employment, real wages, foreign direct investments and labor productivity as independent variables alongside the economic growth. After theoretical background, correlation and regression analysis will be done in order to test the relationship between Gini coefficient as a dependent variable and GDP per capita, employment, real wages, foreign direct investments and labor productivity as independent variables. The fundamental assumption for a clear econometric analysis is the stationarity of data time series. Therefore, before the regression analysis is made, the stationarity of the variables involved in the regression model will be checked. A regression analysis will be followed by examination of stationarity of time series, as well as the imperative specifications for selecting the best model from all of the available alternatives. The research will be based on time series as they are more significant when analyzing individual countries. The data on empirical analysis that refer to the analyzed period will be taken from State Office of the Republic of Macedonia and World Bank. Analyzing these determinants is of a great importance because such analysis can be used by creators of economic policies, in the direction of decreasing income inequality and helping the economy and its citizens from the consequences of a high level of inequality, especially in the context of developing countries as economically damaging effects of income inequality are more difficult for developing countries because they already have weak economies.