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The Relationship Between Informal Economy and Income Inequality: An Econometric Analysis for BRICS Countries

Author

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  • Hakan Kum

    (Department of Economics, Faculty of Economics and Administrative Sciences, Nevsehir Haci Bektas Veli University, Nevsehir, Turkey.)

Abstract

This research investigates the intricate relationship between the informal economy and income inequality in BRICS nations from 2000 to 2018. Defining the informal economy as economic activities outside the formal sector contributing to GDP, the study addresses a gap in existing literature that tends to overlook this sector's impact on income distribution. Utilizing panel unit root and panel cointegration tests, the findings reveal a significant and direct correlation between income inequality, the informal economy, and GDP in BRICS countries. The study uncovers a noteworthy revelation: a 1% increase in the informal economy leads to a substantial 3.24% rise in the GINI coefficient, showcasing the informal sector's profound influence on income inequality. Country-specific analyses identify India and Russia as frontrunners in this correlation, with China, Brazil, and South Africa following suit. Intriguingly, the analysis indicates that while a 1% rise in official GDP slightly worsens income distribution, the informal economy exerts a disproportionately negative impact on income inequality. This research provides valuable insights for policymakers, emphasizing the need to consider the informal economy's role in crafting effective strategies for mitigating income inequality within the BRICS context.

Suggested Citation

  • Hakan Kum, 2024. "The Relationship Between Informal Economy and Income Inequality: An Econometric Analysis for BRICS Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 14(1), pages 117-125, January.
    • Handle: RePEc:eco:journ1:2024-01-11
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Income Inequality; Informal Economy; Poverty Measurement; BRICS Economies;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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