Does Democracy Reduce Economic Inequality? If So, How?

Abstract

Democracy is frequently framed as a distributional game. Much of the evidence supporting this possibility rests on the World Bank’s “high-quality” inequality dataset (Deinenger and Squire 1996). Using the updated and revised “high-quality” dataset (WIID, Version 2, 2007), this paper revisits those results. Using the same country sample, more years and nearly equivalent specifications as previous studies, as well as a larger country sample with more appropriate statistical models, we find no relationship between democracy/civil liberties and aggregate measures of economic inequality. We also examine channels through which democracy might exert its influence, notably the tax system and the labor market. We find no evidence that democracy increases the average tax rate, the yield from progressive taxes or the share of revenue from progressive taxes. We also find no evidence that democracy compresses inter-industry wage dispersion in manufacturing. Whether, and how, democracy decreases economic inequality remain open questions.

Keywords: causes of inequality, democracy, wages, taxes, mechanisms

JEL Classification: D31, J3, H00