Does income inequality feed the Dutch disease?

While much ink has been spilled over the study of income inequality and the Dutch disease in isolation from each other, little attention has been paid to the association between these subjects of interest. From this perspective, the present paper develops a two-sector growth model including two groups of workers (skilled and unskilled) with different consumption baskets. The model is induced by a relative real wage between sectors and between workers in the short-term (comparative static), while it is driven by the relative productivity growth and also a change in the relative consumption expenditure, resulting from an income inequality change, in the long-term. The main findings are twofold. First, a natural resource boom reduces income inequality if the relative real wage of skilled to unskilled workers is stronger than their relative share on windfall income benefit (subsidies). Second, falling income inequality exacerbates the intensity of the Dutch disease if skilled workers, with respect to unskilled workers, allocate a larger expenditure share for traded goods. Using the dynamic panel data approach for a sample of 79 countries over the period 1975-2014, I evaluate the theory’s predictions. The empirical study represents some clear evidence in supporting the crucial role of income inequality in the economic performance of resource-dependent countries.