Essay on Income Inequality, Trade Openness, and Life Satisfaction in Latin America

Abstract

This doctoral dissertation focuses on different topics related to income inequality in different geographic regions of the world. Income inequality is a multidisciplinary concept, not only studied in economics but also by other social sciences, such as sociology and psychology. Income inequality and its effects for human wellbeing have been widely debated, having reached inconclusive findings regarding its causes and consequences. This dissertation consists of three different essays. The first section tests how the nature of trading partners and products affects income inequality in Latin America over the period 1989-2015. The second study provides an explanation for the nexus between income inequality and life satisfaction in low- and middleincome countries through delving into the role of opportunity. The last part examines the psychological role of the palliative function of system justification theory in the link between inequality and life satisfaction link in Europe. The first essay takes into account several theoretical developments regarding the relationship between trade openness and income inequality, accounting for trade flows’ direction, skill-biased technological change, countries’ factors abundance relative to other countries, and the nature of products (primary products, intermediate products, equipment products, and consumption products). Based on a panel dynamic approach to take into account the high persistence of income inequality, the findings show a more apparent role of exports, in particular the exports of primary commodities (agriculture and oil goods), in reducing income inequality in Latin American countries, while the role of high skill-intensive goods is less clear. Overall, the study concludes that the relationship between trade openness and income inequality is significantly influenced by how countries are integrated into the international economic system.

The second essay draws on the role of opportunity to explain the relationship between income inequality and life satisfaction in low- and middle-income countries. This essay seeks to identify the reason why people living in unequal countries are satisfied with their lives through considering different political and social aspects, such as personal rights, personal freedom and choice, and access to education. Estimating multilevel models to explain cross-country differences in individuals’ life satisfaction, the study evidences that income inequality is irrelevant for individuals’ subjective wellbeing when the level of opportunity is high, while income inequality becomes more salient when the level of opportunity is low. Thus, the research suggests that the stability of social and political system of the country plays an important in the nexus between income inequality and life satisfaction. That is, when people are granted the possibility to take their chances, inequality becomes tolerated and hence people become more satisfied with their lives. The last essay inquiries into the palliative function of system justification. We seek to explain how people respond to inequality and to identify the consequences for life satisfaction in 27 European countries. The empirical approach accounts for the potential indirect effects by estimating mediation model using Structural Equations Modeling. The results emphasize the importance of subjective attitudes toward inequality in explaining life satisfaction and support for redistributive policies. On the one hand, the estimations reveal that people with high system justification are less inequality averse and oppose redistributive policies, and are more satisfied with their lives. The positive direct effect of system justification on life satisfaction is reinforced through the indirect effects via inequality aversion and support for redistribution. On the other hand, individuals with high inequality aversion are less satisfied with their lives and support government intervention to eliminate social disparities. Thus, the results give support for the ‘palliative function’ hypothesis.