General perspective of income inequality in Palestine

Abstract

This study represents the first step in studying income inequality in Palestine. using the consumption inequality as an indicator to income inequality, the main purpose for this study was to investigate the dynamic interrelations among different macroeconomic indicators and the consumption inequality using a time series if data from 1996-2011. Vector Autoregressive model with an application of impulse response functions and the variance decomposition of forecast errors were used to study the dynamic interrelations and the transmission channels between the income inequality, trade openness, unemployment rate and the economic growth. Stationary properties of the series used in the study were integrated at first order AR (1). Also, this study has applied the Johannsen test of Cointegration to examine the existence of long run relationships between different variables. Different inequality measures have been calculated through the study, the empirical analysis was based on the Theil's T index to measure inequality. This study has argued that based on the empirical distribution of consumption data the Theil's T index was the best inequality measure to capture the reality of inequality in Palestine. This study has showed that the VAR model used was stable and so the study proceeded to test for the granger causality between the different variables and to analyze the transmission channels between the variables using IRFs. The Granger Causality Test has showed that each pair of the variables included are Granger causing each other except for the relation between the GDP per capita growth and the Theil's T index which shows that the GDP growth is causing the consumption inequality where on the other hand the consumption inequality doesn't granger cause the growth in GDP per capita. The IRFs has showed that trade openness, unemployment r and the economic growth are positively affecting the Theil's T index. The FEVD have showed that for a forecast horizon of five years, up to 30% of the changes in the consumption inequality in Palestine can be explained by changes in the growth in GDP growth per capita and that the trade openness explains about 1% of the changes in the consumption inequality and about 7% of the movements in consumption inequality can be explained by changes in the unemployment rate.