Does international trade moderate economic development's impact on income inequality in the EU?

Abstract

We analyze the U-shaped effect of economic development, indicated by GDP per capita, on income inequality. Using extensive data from European Union (EU) countries, we find that at lower GDP per capita levels, increases in GDP per capita reduce income inequality. However, beyond a certain threshold, further GDP per capita growth contributes to rising income inequality. International trade plays a moderating role, reducing income inequality at higher GDP per capita levels, though this effect is less pronounced in Eastern Europe. Our findings highlight the need for trade policies across the EU that ensure international trade has positive effects on income distribution. © 2024 Elsevier B.V.