Extending Theil's Inequality Index: Addressing Dynamic Convergence in the OECD
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Theil’s inequality index is used to measure convergence in 14 Organization for Economic Cooperation and Development (OECD) countries in terms of per capita income, per capita government and investment expenditures, and industrial employment. Results indicate that all four variables have converged over the sample period, 1950-1988. Next, the indices of the four variables are made dynamic by using pairwise cointegration and Johansen’s I(2) multi-cointegration tests. These tests indicate that the four inequalities are cointegrated; that is, there exists a long-run equilibrium between the four inequalities of the 14 OECD countries. However, the inequality in per capita government expenditure has no effect on the G-7 equilibrium when analyzed without the Other 7.