The impact of national culture on income inequality and the moderating effect of national wealth

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NIVERSITY OF

A

MSTERDAM

MASTER’S THESIS

The Impact of National Culture on Income Inequality and the

Moderating Effect of National Wealth

Faculty of Economics and Business

MSc. in Business Administration – International Management Track First Supervisor: Dr. Ilir Haxhi

Second Supervisor: Francesca Ciulli

Name: Lisa Pröfrock Student Number: 10825398

Submission Date of Final Draft: 29/06/2015 Number of Words: 21,144

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Statement of Originality

This document is written by Lisa Pröfrock who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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List of Tables and Figures

Table 1: Overview of Variables Used in Models 1-5 ... 39

Table 2: Overview of Variables Used in Models 6-9 ... 39

Table 3: Collinearity Statistics ... 46

Table 4. Descriptive Statistics: Means, Standard Deviations and Correlations ... 47

Table 5: Regression Results Models 1-5 ... 52

Table 6: Regression Results Models 6-9 ... 53

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Abstract

Previous research shows that income inequality has its origins in the implementation of particular wage compensation practices, while it has identified national culture as an

important driver of cross-national dissimilarities in those practices. We argue that particular cultural dimensions favor either an equal or unequal distribution of wages among a country’s population, determining its levels of income equality or inequality. This study investigates how national culture, and more particularly Hofstede’s national cultural dimensions power distance, individualism, masculinity, uncertainty avoidance and long-term orientation respectively, will influence a country’s level of income inequality. In addition, earlier

literature claims that a country’s level of national wealth affects certain cultural dimensions as well as income inequality. Therefore, we argue that national wealth moderates the

relationships between (1) power distance and income inequality, (2) individualism and income inequality and (3) uncertainty avoidance and income inequality. For a sample of 97 countries, after controlling for unemployment rate, rate of public employment, trade

liberalization and union density, our findings reveal that first, power distance has a positive impact on income inequality. Second, individualism, uncertainty avoidance and long-term orientation are negatively associated with income inequality. Third, masculinity has no significant influence on income inequality. Furthermore, results indicate that there exists no moderating effect of national wealth on the above-mentioned three relationships. This research contributes to the existing literature by providing a more complete understanding of the principal causes of income inequality. Specifically, it shows that particular dimensions of national culture can determine a country’s level of income inequality.

Keywords: National culture; Hofstede’s cultural dimensions; Income inequality; National

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1. Introduction

Economic studies have addressed the issue of the structure of income for a long time and even date back to the era of Adam Smith in the 18th century (Machin & van Reenen, 2007). The disposable income of private households is one of the key indicators of a population’s level of prosperity within a nation. Especially wages are a major determinant of private households’ incomes and economic well-being. Moreover, the distribution of income within the society is an indicator of the distribution of material resources (OECD, 2001). Income inequality hence refers to the phenomenon of an unequal distribution of income across the population in an economy. In the literature, there is a broad consensus that income inequality in many

countries, especially in industrialized countries, has increased considerably in recent decades (Jaumotte, Lall & Papageorgiou, 2013; Sommerfeld, 2013; OECD, 2011; Autor, Katz & Kearney, 2008). Rising income inequality is usually associated with either declining real earnings of one segment of the population, or with different paces of participation in the general prosperity development, such as when wages rise faster in higher sections than within lower wage segments (Mishel, 2013; Mishel & Finio, 2013). Consequently, having stagnant median wages, the gap between rich and poor increases (Hoynes, Page & Stevens, 2006). Since changes in income inequality are perceivable in consumption and poverty rates, both an understanding and measurement of income inequality are relevant in terms of positive and normative perspectives (Machin & Van Reenen, 2007).

Besides focusing on the reasons for changes in income inequality, economic literature has further increasingly investigated cross-national differences in income inequality in recent years. This interest is attributable to both the improved availability of data concerning income distributions within most countries of the world and the concern to comprehend the

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income allow to set a benchmark, which indicates whether a country varies significantly from or is comparable to other countries (Gottschalk & Smeeding, 1997).

Although several researchers observed a rise in income inequality in many countries in recent years, income inequality is generally considered to be relatively stable within countries in the long-run but differs significantly among countries (Li, Squire & Zou, 1998). This proposition implies that income inequality is driven by factors that are relatively consistent within countries but that tend to vary considerably across countries (Li et al., 1998). Several antecedents of income inequality have been identified to understand cross-national differences and trends in income inequality. A country’s level of income inequality is for instance

influenced by its political economy (Bertola, 1993), imperfections in its credit markets (Banerjee & Newman, 1991), its level of economic development (Kuznets, 1955; Ram, 1991; Alderson & Nielsen, 1999; Barro, 2000; Thornton, 2001), skill endowment of the workforce (Koeniger, Leonardi & Nunziata, 2007) and its openness to trade (Beyer, Rojas & Vergara, 1999; Hanson & Harrison, 1999; Galiani & Sanguinetti, 2003). In addition, researchers find that the institutional context also plays an important role in determining income inequality. More specifically, government policies like equal pay legislations and the establishment of minimum wages (Rueda & Pontusson, 2000) as well as labor market institutions (Koeniger et al., 2007) are significant antecedents of income inequality. Due to the technological change, the fact whether modern technologies are increasingly deployed in a country also matters in terms of income inequality (Acemoglu, 2002; Machin, 2008). Lastly, the extent of

discrimination between genders or between ethnical groups within a country further drives income inequality (Card & DiNardo, 2002).

However, scientific researchers, who examined income inequality and its origins so far, avoided to include national culture as an additional antecedent of income inequality. This is ascribable to the perception of national culture as a broad and ubiquitous construct that is difficult to put into empirically testable theories (Guiso, Sapienza & Zingales, 2006).

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Although the availability of cultural data improved and thus better methods to empirically test cultural influences on income distribution are accessible (Guiso et al., 2006), Malinoski (2012) was the only researcher who tested the effect of culture on income inequality so far. Using data on both Hofstede’s cultural dimensions and the Gini coefficients from 75

countries, findings of Malinoski’s (2012) study reveal that high levels of power distance lead to high levels of income inequality. High levels of both individualism and long-term

orientation, by contrast, are associated with lower levels of income inequality. However, Malinoski’s (2012) findings are not directly generalizable because they were obtained by examining data from only 75 countries worldwide. Up to now, researchers have not carried out any further studies in order to confirm this discovered causal link between national culture and income inequality by using data from a greater number of countries. Therefore, this thesis analyzes data from 97 countries worldwide to fill this research gap. Based on Malinoski’s (2012) study, we represent national culture by Hofstede’s cultural dimensions power distance, individualism, masculinity, uncertainty avoidance and long-term orientation. Likewise, we measure income inequality by the Gini coefficient.

Furthermore, little is known so far about possible moderators of the relationship between national culture and income inequality. Existing research indicates that a country’s level of wealth affects both national culture (Hofstede, 2001) and the degree of income inequality (Kuznets, 1955; Ram, 1991; Galor & Zeira, 1993; Alderson & Nielsen, 1999; Chang & Ram, 2000; Thornton, 2001). Yet, no previous research has considered a possible moderating effect of national wealth on the relationship between national culture and income inequality. In order to fill this research gap, we argue that the fact whether a country is rich or poor provides the basis for certain cultural characteristics that foster or lessen the degree of income inequality. Consequently, we assume that the strength of the relationship between national culture and income inequality is moderated by a country’s level of national wealth, measured by its gross domestic product (GDP) per capita. More concretely, the research

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question, on which this thesis will focus, is twofold: (1) How is income inequality affected by

national culture and (2) how does a country’s level of national wealth influence the relationship between national culture and income inequality?

Previous literature shows that large parts of income are generated by wages, which in turn are determined by the use of different wage compensation systems (Khan & Riskin, 2005). Therefore, we put emphasis on the influence of national culture on the implementation of different wage compensation systems in organizations within a country. More specifically, national culture is a significant driver for cross-national dissimilarities in human resource management (HRM) practices and policies, which include compensation and reward management systems (Schuler & Rogovsky, 1998). These varying practices in different countries hence determine whether rewards are distributed rather equally or unequally and may result in cross-national differences in income inequality (Segalla, Rouziès, Besson & Weitz, 2006).

In order to answer this thesis’ research question, we test the proposed hypotheses by using several multiple linear regression analyses. These analyses are conducted based on a sample of 97 countries that we obtain through both Hofstede’s Dimension Data Matrix for cultural data and the Standardized World Income Inequality Database (SWIID) for Gini coefficient data. After controlling for unemployment rate, rate of public employment, trade liberalization and union density, findings reveal that national culture influences a country’s level of income inequality. More specifically, they show that first the national cultural

dimension power distance has a positive impact on income inequality. Second, individualism, uncertainty avoidance and long-term orientation are negatively associated with income

inequality. Third, masculinity has no significant influence on income inequality. Furthermore, results indicate that there exists no moderating effect of national wealth on the relationship between national culture and income inequality.

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In terms of theoretical implications, we provide a more complete understanding of the principal causes of income inequality by focusing on national culture as a significant

antecedent. By investigating the impact of national culture on income inequality, we further verify the findings of the only existing study on national culture and income inequality. Moreover, we turn attention to a possible moderator of this relationship by providing clarity about the influence of national wealth on the strength of the impact of national culture on income inequality.

Concerning practical implications, this thesis contributes to an understanding why some countries are more likely to have income inequality, while others are not. Due to the findings that particular characteristics of national culture lead to low levels of income inequality, managers are encouraged to contribute to a more equal distribution of income by providing incentives to strengthen the national cultural dimensions individualism, uncertainty avoidance and long-term orientation but also to weaken the dimension power distance within a country. More specifically, they are supposed to create organizational circumstances that contribute to make people less willing to accept inequalities, more individualistic, more reluctant to uncertainty and more future-oriented.

This master’s thesis is structured as follows. The next section reviews the concepts of income inequality and national culture. Moreover, we consider the relationship between national culture and income inequality as well as the role of national wealth and its

relationship with national culture and income inequality. In the third section, we develop the theoretical framework and hypotheses, and present the conceptual framework. The

methodological section provides an overview of the sample, data collection, variables and the method of analysis used in this thesis. Section five shows the descriptive statistics and the results of the empirical regression analysis. We interpret those results in the discussion section, which further stresses theoretical and managerial implications as well as limitations and suggestions for future research. Finally, this thesis finishes with a conclusion.

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2. Literature Review

2.1 Income Inequality

The literature uses a wide range of terms such as wage inequality, wage dispersion, income differences, income disparity and income inequality that are all referring to the phenomenon of an unequal distribution of income in general or wages in particular across the population in an economy. Wage inequality within a particular country for instance refers to a summarizing measure of the distribution of gross income from employment. It can be seen as a component of income inequality, which furthermore comprises government transfers, distributive effects of taxation and income sources like income from capital (Rueda & Pontusson, 2000). For the sake of completeness, we use the term income inequality hereafter.

Researchers who examined income inequality in particular countries over a certain period of time, observed a continuous and substantial rise in income inequality (Jaumotte et al., 2013; Sommerfeld, 2013; OECD, 2011; Autor et al., 2008). Distributive effects of taxes and government transfers lead to a compression of income inequality, particularly at the lower end of the income distribution, but only have a small mitigating effect on the overall trend (Heathcote, Perri & Violante, 2010). The literature argues that changes in income inequality are perceivable in consumption and poverty rates. Therefore, an understanding of the main drivers of increases in income inequality is important in terms of both positive and normative perspectives (Machin & Van Reenen, 2007).

A common assumption which explains the increase in income inequality is about technological change and modern technologies that lead to a growing demand for highly skilled workers (Acemoglu, 2002; Machin, 2008). The hypothesis of skill-biased

technological change implies that the value of education and skills raised due to the augmented use of computers at the workplace, which also helps to explain the increase in

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returns to education (Neckerman & Torche, 2007). It is assumed that the demand for highly skilled employees in comparison to the demand of low skilled employees is raising uniformly across the entire income distribution (Autor, Levy & Murnane, 2003). According to this rising demand, even income differences between skilled and unskilled employees increase

significantly, which is considered as the main factor that determines the enlarged income inequality. Therefore, the balance between demand and supply within the labor market is treated as one of the driving forces of income inequality. Particularly in the USA, the benefits of higher educational qualifications increased considerably during the 1980s. This happened despite the fact that there was an abrupt extension of the supply of employees with a similar education due to the expansion of education. In the 1970s, this educational expansion was still associated with decreasing returns to education (Levy & Murnane, 1992). If returns to

education increased in spite of the extensive expansion of education, the demand for higher educational qualifications increased even faster than the supply of such degrees. This demand in turn can only be generated by technological change (Groß, 2009).

Since the 1990s some researchers argue that there is evidence for a polarization of employment, particularly in the USA, Great Britain and Germany (Goos & Manning, 2007; Autor et al., 2008; Spitz-Oener, 2006). This refers to a U-shaped course of employment across the entire income distribution. Both the employment of highly skilled workers and the

employment of low skilled workers increase relative to the employment of workers with average skill levels (Goos & Manning, 2007). In order to explain this development, it is assumed that there is a changing demand for job characteristics (‘tasks’) over time, which may result in a non-monotonic development of labor demand across the entire income distribution (Autor et al., 2003). Moreover, Autor et al. (2003) propose that technological progress, for instance in terms of an increased use of computers, leads to a declining demand for routine tasks in the medium range of income distribution. The demand for non-routine tasks both in the upper and lower range of income distribution increases by contrast.

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Although several researchers observed a rise in income inequality in many countries in recent years, income inequality is generally considered to be relatively stable within countries, which indicates that a reduction of poverty is decisively determined by the rate of economic growth (Li et al., 1998). However, income inequality differs considerably between countries, suggesting that people from poorer sections of an inegalitarian economy benefit less from any national increase in income than those in a more egalitarian economy. Consequently, it is assumed that income inequality is driven by factors that are relatively consistent within countries but tend to vary considerably across countries (Li et al., 1998).

Especially the institutional context within a country matters in terms of income

inequality. Government policies have an impact on the distribution of incomes largely through the determination of minimum wages and equal pay legislations (Rueda & Pontusson, 2000). Moreover, changes in income inequality are largely attributable to changes in labor market institutions (Koeniger et al., 2007). Several researchers find that low union density is related to high income inequality (Machin, 1997; Kahn, 2000; Card, 2001; Card, Lemieux & Riddell, 2004). Especially in the private sector income inequality is higher than in the public sector since unions are more influential in the public sector (Koeniger et al., 2007; Checchi, Lucifora, Boeri & van Ours, 2002). Similarly, declines in minimum wages increase income inequality (DiNardo, Fortin & Lemieux, 1996; Lee, 1999; Dickens, Machin & Manning, 1999). Strict employment protection legislation and unemployment benefit replacement rates, by contrast, lead to a more compressed distribution of incomes (Koeniger et al., 2007). Bertola (1993) states that a country’s political economy also influences its degree of income inequality. This is due to the assumption that rich inhabitants exhaust their possibilities to affect policies which have a bias towards them and treat others less favorably. In addition, credit market imperfections are another antecedent of income inequality (Banerjee & Newman, 1991). Constraints on the granting of credits restrict the possibilities of poor inhabitants to invest in their education in order to improve their productivity and economic

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position (Li et al., 1998; Malinoski, 2012). The variance of income can be limited through political decisions and institutional circumstances but only at the expense of a suboptimal balance between demand and supply. For instance continental Europe is charged for its relatively low levels of income inequality with high unemployment rates of low skilled employees (Prasad, 2004).

Furthermore, the skill endowment of the work force is positively related to high income inequality. The higher the share of workers who are over the age of 24 and

consequently at the top of their experience-earnings profiles, the higher the income inequality (Koeniger et al., 2007). Likewise, Neckerman and Torche (2007) find that increasing returns to higher education significantly influence the dispersion of incomes.

Another important aspect that should be considered during the investigation of antecedents of income inequality, especially in developing countries, is the level of trade liberalization. A more open trade system leads to a more unequal distribution of incomes between skilled and unskilled workers (Beyer et al., 1999; Hanson & Harrison, 1999; Galiani & Sanguinetti, 2003).

Discrimination between genders or between ethnical groups is an additional determinant of income inequality. Although the disparity of incomes between genders, especially in the USA, diminished over the past decades and the discrepancy between black and white employees remained stable since the 1980s, the impact of both gender and ethnical belonging on the earned income can be still noticed (Card & DiNardo, 2002).

Finally, a country’s national culture further affects income inequality. Particularly Hofstede’s national cultural dimensions have a significant influence on a country’s level of income inequality (Malinoski, 2012). A definition of national culture and a detailed

description of Hofstede’s cultural framework is presented in the following section. Moreover, an in-depth elaboration on how Hofstede’s national cultural dimensions affect income

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2.2 National Culture

In the literature, there are plenty of definitions of culture, however a detailed description of each of them would go beyond the scope of this thesis. According to Hofstede (1984, p. 82), “culture is the collective programming of the mind, which distinguishes the members of one group or society from those of another”. This definition emphasizes that culture is rather a collective than an individual construct, which is not immediately visible, primarily expressed by behaviors and is familiar to some but not to all people (Hofstede & McCrae, 2004).

Hofstede’s seminal framework of cultural differences among countries is assumed to be the most dominant of cultural classification (Kirkman, Lowe & Gibson, 2006). It is salient in cross-cultural research based both on its clearness and simplicity and on good resonance from managers (Kirkman et al., 2006). Furthermore, Hofstede’s framework is viewed as “a watershed conceptual foundation for many subsequent cross-national research endeavors” (Fernandez, Carlson, Stepina & Nicholson, 1997, p. 44).

The original study of Hofstede which dates from 1980 is based on four cultural value dimensions that, taken together, characterize national culture (Hofstede, 1980a). Hofstede made a survey between 1967 and 1973 among more than 117,000 employees working in 40 different countries for IBM. By analyzing the thereby resulting data on work-related values, Hofstede discovered four dimensions that provided reasons for cross-country differences in responses to the survey questions. As a result, Hofstede named those dimensions ‘power distance’, ‘individualism’, ‘masculinity’ and ‘uncertainty avoidance’. Each of the 40 countries was allocated a score between 0 and 100 for each dimension, which represents relative and not absolute values (Drogendijk & Slangen, 2006; Tang & Koveos, 2008). In 1991 a fifth dimension, ‘long-term orientation’, was added, followed in 2010 by a sixth dimension called ‘indulgence versus restraint’ (Hofstede, 1991; Hofstede, Hofstede & Minkov, 2010).

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available increased over time (Drogendijk & Slangen, 2006). Since there are both more data available for the countries investigated and more theoretical foundations pertaining to income inequality or national wealth, this study focuses on Hofstede’s first five dimensions power distance, individualism, masculinity, uncertainty avoidance and long-term orientation as characteristics of national culture.

First, the power distance index indicates the extent to which members of a society are willing to accept both an unequal distribution of power and a hierarchical structure in

institutions and organizations within a country (Hofstede, 1980b; Hofstede, 2001). It hence reveals individuals’ sensitivity to differences in status, opportunity and wealth (Hofstede, 2001). Moreover, countries with high scores on power distance are characterized both by an unequal distribution of power and by citizens who do not claim any justification for

inequalities (Hofstede, 2001).

The second dimension, individualism versus collectivism, refers to the degree to which members of an organization see themselves rather as part of a particular group and take care of each other mutually or whether they only care for themselves (Hofstede, 1980b). In countries with high scores on individualism, people are independent, self-sufficient, have loose ties between each other and put a lot of emphasis on individual achievements (Griffith, Yalcinkaya & Rubera, 2014). Collectivist cultures, by contrast, are characterized by close ties between each other and values such as loyalty, social cohesion and harmony are very

important (Hofstede, 1980b; Griffith et al., 2014).

Third, a masculine society is characterized by values like assertiveness, competition, achievement and success and individuals strive towards being the best in their field (Hofstede, 1980b; Griffith et al., 2014). Additionally, in a country scoring high on masculinity, people tend to have a high regard of personal strength and make their decisions independently (Hofstede, 2001). A feminine society, on the other hand, stresses values like modesty, caring for others, social welfare and quality of life (Hofstede, 1980b; Hofstede, 2001). Individuals in

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a feminine culture emphasize cooperation and harmonious relationships and they usually base their decisions on consensus (Griffith et al. 2014).

Fourth, uncertainty avoidance denotes the avoidance of uncertain, unpredictable and unclear situations and the preference for stability, formal rules and firm principles. Individuals in countries with high levels of uncertainty avoidance show high degrees of anxiety, which stimulate them to work hard (Hofstede, 1980b). Furthermore, they are more resistant to change and less willing to take risks. Instead, individuals prefer to maintain rigid belief-systems (Hofstede, 2001).

Finally, cultures that are long-term oriented adopt behaviors like patience, saving and persistence that aim at future rewards. Short-term oriented cultures, by contrast, are more focused on the past and the present and emphasize traditions as well as the fulfilment of social responsibilities (Hofstede, 1991).

Hofstede’s cultural framework has also been subject of criticism. Critics argue that the complexity of national culture cannot be adequately diminished into five dimensions and that the framework disregards the instability and heterogeneity of national culture within a single country. Moreover, they point to the fact that Hofstede used only one multinational enterprise (MNE) as a sample for his considerations and that the IBM employees cannot be considered as representatives of their respective countries (Sivakumar & Nakata, 2001; Schwartz, 1994). Schwartz (1994) raises the concern that Hofstede’s cultural dimensions might not have the same meaning across countries, indicating that people from dissimilar cultures may interpret them differently. Additionally, Hofstede’s initial survey was not conceptualized to detect national cultural dimensions and is assumed to have missed relevant questions (Schwartz, 1994). Likewise, a different number of cultural dimensions could have been the result if Hofstede had included additional countries into the sample, assuming that the initial selection of countries did not represent the whole range of national cultures (Schwartz, 1994).

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Despite these criticisms, Hofstede’s definition of culture as well as his cultural dimensions have been widely adopted by a variety of business disciplines and the use of his framework in scientific research is still increasing (Sivakumar & Nakata, 2001). In terms of competing cultural dimensions, Hofstede’s cultural dimensions have a superior impact (Tang & Koveos, 2008). Moreover, many scientific studies confirm the validity of Hofstede’s cultural dimensions, which results in the assumption that they can be utilized in order to categorize countries corresponding to their national cultures (Drogendijk & Slangen, 2006). Consequently, it is appropriate to use Hofstede’s framework and his cultural dimensions within the frame of this master’s thesis.

According to the literature, cross-national differences in Hofstede’s national cultural dimensions are determined by several institutional antecedents (Steenkamp, 2001; Tang & Koveos, 2008). Religion is one of the main driving forces of national culture (Gomez-Mejia & Palich, 1997). Specifically, Protestant countries have lower levels of power distance and masculinity compared to Catholic, Islamic or Hindu countries. Furthermore, Catholicism induces high scores on uncertainty avoidance contrary to Protestantism, Buddhism and Islam (Tang & Koveos, 2008). A country’s legal system is another antecedent of national culture. There exists a positive relationship between clearly defined laws and regulations and uncertainty avoidance (Tang & Koveos, 2008). Moreover, the political system of a country influences its culture. Schwartz and Bardi (1997) find evidence in their study that differences in value priorities between Eastern and Western European countries are due to the fact that Eastern European countries adapt to the life circumstances of communism.

Hofstede (1980a) finds that the gross national product (GNP) per capita, as an

indicator of a country’s level of wealth, is another influencing factor of cultural dimensions. A country’s GNP is specified as the value of all goods and services that are produced by a country’s citizens within and beyond its borders (Brezina, 2012). Countries with high values of GNP per capita show low levels of power distance and uncertainty avoidance but high

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levels of individualism. Additionally, Hofstede (1980a) argues that latitude, as a proxy for climate, further influences cultural dimensions. Colder climates lead to high degrees of individualism and low levels of power distance, which is attributable to the assumption that increased personal initiative is necessary for survival (Steenkamp, 2001).

Similarly, wealth and urbanism are positively associated with individualism, whereby countries that are characterized by large families and by a large proportion of the workforce working in the agricultural sector have low degrees of individualism (Triandis, McCusker & Hui, 1990; Steenkamp, ter Hofstede & Wedel, 1999).

The differences between national cultures of countries can be captured by comparing their different scores on Hofstede’s cultural dimensions or by measuring the cultural distance between them. Cultural distance can be defined as “a measure of the degree to which shared norms and values in one country differ from those in another country” (Tadesse & White, 2010, p. 147). In order to measure cultural distance between two particular countries, most studies use Kogut and Singh’s (1988) index, which is grounded on Hofstede’s (1980a) national cultural dimensions framework. This index corrects the differences in the scores of Hofstede’s dimensions by taking into account the differences in each dimension’s variance and then building the arithmetic average (Drogendijk & Slangen, 2006).

How differences in national cultural dimensions between countries can result in different levels of income inequality will be discussed in the following section.

2.3 National Culture and Income Inequality

In order to detect the influence of national culture on income inequality, it is important to focus on the mechanisms of income generation (Groß, 2009). More specifically, a large part of income is generated by wages (Khan & Riskin, 2005). Wages in turn are determined by the use of different compensation systems. Hence, this part of the thesis principally emphasizes

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the impact of national culture on the implementation of different wage compensation systems in organizations within a country. Differences in national cultures have a provable impact on both organizational and administrative practices as well as on employees’ expectations (Kogut & Singh, 1988). In particular, national culture is a significant driver for cross-national

dissimilarities in HRM practices and policies (Schuler & Rogovsky, 1998).

Since national culture affects HRM and hence an organization’s compensation and reward management system, practices may vary between different countries (Aycan, 2005). Furthermore, employees’ preferences concerning wage compensation are culture-bound as well, which results in the conclusion that wage compensation practices have to be suitable to particular cultural circumstances (Hofstede, 1980a; Pennings, 1993; Redding, 1994). Due to the increasing predominance of MNEs, an understanding of the effect of culture on

organizational wage compensation practices and how employees with different cultural backgrounds perceive different rewards is crucial for international management (Chiang, 2005). Managers’ national cultures have an important impact on their decisions concerning remuneration of their employees, especially whether they choose fixed or variable

compensation systems and an equally or equitably distribution of rewards (Segalla et al., 2006).

National cultural characteristics in terms of Hofstede’s cultural dimensions framework can be directly associated with the evaluative focus of a pay system. In high power distance cultures, different salaries could be paid to employees in the same rank, which means that people instead of jobs are valued (Aycan, 2005). Furthermore, people are willing to accept both an unequal distribution of power and a hierarchical system within a country without even claiming any justification (Griffith et al., 2014). This hierarchical system leads to increased organizational layers and greater wage differences between subordinates and superiors in the different layers, which in turn results in inequalities concerning opportunity, status and wealth (Gomez-Mejia & Welbourne, 1991; Hofstede, 2001). Similarly, Black (2001) argues that high

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scores on the power distance dimension lead to a wider wage dispersion in firms within a country.

Collectivist cultures are assumed to prefer appreciation of achievements made as a group, whereas individualistic cultures are likely to favor evaluation of individuals’ performance (Cable & Judge, 1994). In addition, collectivism sets great value upon the principle of equality in reward distribution. Hence, in countries that emphasize high

collectivism, firms tend to use team-based reward methods and stress an equal distribution of wage compensation between employees, whereas individual focused and equity-based

rewards are opposed (Ramamoorthy & Carroll, 1998). In individualistic cultures, by contrast, employees are rewarded according to individual performance and receive commission based on the equity principle (Aycan, 2005; Leung, 1997). Similarly, Hui, Triandis and Yee (1991) ascertain the assumption that cultures that are high on collectivism are more likely than individualistic cultures to stress a more equal allocation of rewards in a hypothetical scenario when resources are abundant. When the resources for reward are set, collectivist subjects allocate rewards to close friends more generously than to co-workers, whereas individualistic subjects do not make any differentiation. Individualistic employees are more likely to allocate more reward to themselves than do collectivist employees (Tower, Kelly & Richards, 1997). Consequently, wage differences in individualistic cultures are higher than those in collectivist cultures (Triandis, 2001). Furthermore, highly collectivist cultures put more emphasis on internal equity rather than on external equity, which means that employees are paid based on seniority, loyalty or hierarchical status rather than on the market rate of wages or competitors’ wages (Ramamoorthy & Carroll, 1998).

In masculine cultures, wage compensation practices are based on prevalent gender stereotypes and hence pay men and women differently (Gomez-Mejia & Welbourne, 1991). Whereas men are rewarded with promotions if they perform well in their jobs, women are supported by wage compensation models that foster maternity leave and part-time work

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(Gomez-Mejia & Welbourne, 1991). Therefore, Black (2001) finds that high scores on the masculinity dimension result in a wider wage dispersion in firms within a country.

Wage compensation systems which are based on seniority provide a certain degree of certainty and predictability and are therefore most prevalent in countries where uncertainty avoidance is highly emphasized (Schuler & Rogovsky, 1998). Countries with low levels of uncertainty avoidance, by contrast, prefer wage compensation systems based on individual performance and skills, which are considered as less certain and predictable (Schuler & Rogovsky, 1998). When cultures score high on uncertainty avoidance, the use of variable pay systems is avoided, indicating a negative relationship between levels of uncertainty avoidance and the ratio of variable to total wage compensation (Gomez-Mejia & Welbourne, 1991; Tosi & Greckhamer, 2004). This is also supported by Gooderham, Nordhaug and Ringdal’s (1999) study, which states that firms in countries with high scores on uncertainty avoidance use incentive wage compensation systems considerably less than firms in countries with low scores on uncertainty avoidance. Moreover, a country’s degree of uncertainty avoidance and risk aversion determines whether individuals prefer either fixed or contingent pay systems (Cable & Judge, 1994). Reward in contingent pay systems is primarily conditional on

individuals’ performance but also on factors that are beyond their control, which may lead to the possibility of losing a share of one’s reward. Therefore, individuals with a low willingness to accept uncertainty and risk prefer fixed pay systems over contingent pay systems (Cable & Judge, 1994).

Managers of firms in long-term oriented cultures are more likely to implement fixed compensation plans rather than pay for performance plans based on incentives. By using this sort of parity compensation, they secure employees’ cooperation or even their submission Therefore, managers are able to control their employees’ behavior (Segalla et al., 2006). Managers who operate in short-term oriented cultures, by contrast, make wage compensation contingent on results, which lead to the implementation of a more differentiated remuneration

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system. Incentive compensation according to the equity rule motivates employees to perform best in order to achieve short-term goals and to receive the largest share of wage

compensation (Segalla et al., 2006).

Concerning wage compensation strategies of foreign subsidiaries, Roth and O’Donnell (1996) find evidence that the cultural distance between a subsidiary and its headquarter market significantly influences the subsidiary’s compensation strategy. Their study reveals that the greater the cultural distance between subsidiary and headquarter, the more likely subsidiary employees are to obtain a larger share of their wage compensation through incentives.

2.4 National Wealth and its Relationship with National Culture and Income

Inequality

National wealth is generally defined as a country’s natural resources, its human resources as well as its produced assets (Kunte, Hamilton, Dixon & Clemens, 1998). Natural resources in turn are defined as agricultural land and the natural supply of oil, gas, coal, metals and minerals. Likewise, a country’s produced assets can be considered as the sum of the value of all produced goods and services. The share of human capital in a country’s national wealth includes education, raw labor and social capital (Kunte et al., 1998). For the sake of

simplicity, the use of income per capita is commonly assumed to be an appropriate proxy for the amount of a country’s available resources (Van de Vliert, Huang & Levine, 2004). Furthermore, it indicates the standard of living of a country’s inhabitants (Griffith et al., 2014). In general, the national wealth of a country can be indicated by its GDP, which is defined as “the value of all the goods and services produced in a country in a year” (Griffith et al., 2014, p. 4). Contrary to the GNP, a country’s GDP captures the output that is produced within its borders, both by its citizens or by citizens of other nationalities (Brezina, 2012).

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There are empirical data that income per capita and income inequality are strongly correlated. More specifically, some researchers find that in wealthier countries, wage

differentials are minor and hence income is more equally distributed than in poorer countries (Galor & Zeira, 1993). On the contrary, other researchers claim that countries with high levels of national wealth have a more unequal distribution of income (Chang & Ram, 2000). This concept is based on the assumptions that people with high incomes usually save larger parts of it, leading to an accumulation of more assets and consequently to the receipt of large shares of increased income (Chang & Ram, 2000). Likewise, high economic growth in terms of high levels of GDP fosters both entrepreneurial activities and the implementation of new

technologies, which may benefit only small groups of the population (Chang & Ram, 2000). Furthermore, some researchers tested the hypothesis of Kuznets (1955), who claims that the relationship between income inequality and economic development complies with an inverted U. When a country develops, meaning that its GDP per capita rises, income

inequality increases initially. However, after reaching the highest value, it similarly decreases again when economic development proceeds (Thornton, 2001; Barro, 2000). Cross-sectional studies confirm Kuznets’ hypothesis by providing empirical evidence that in countries with either very low levels or very high levels of economic development, income inequality is relatively low. In countries with intermediate levels of economic development, by contrast, income inequality is relatively high (Alderson & Nielsen, 1999). However, there is also empirical evidence which opposes Kuznets’ hypothesis. Ram (1991) states that the relationship between income inequality and economic development corresponds to a U-shaped curve. Thus, income inequality initially declines with a rise in GDP and then increases after reaching the lowest point. To sum up, a country’s level of income inequality is affected by its level of wealth and economic development, but the literature provides no clear

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As already briefly discussed in section 2.2 of this thesis, national culture seems to be determined by components of the national environment that are non-cultural, for instance national wealth (Van de Vliert, 2006). Hence a country’s level of national wealth is

considered to be a major cause for cultural change (Smith, 2006). Specifically, Inglehart and Baker (2000) find evidence that economic development is related with changes in basic cultural norms and values. Hofstede (2006) argues that national cultural dimensions are correlated with national wealth, indicating that they are affected by it. Individualism for instance is supported by national wealth (Hofstede, 2006). Particularly, national wealth is strongly correlated with individualism and power distance, whereas uncertainty avoidance is only weakly correlated with it. Masculinity and long-term orientation, by contrast, are not linked to national wealth (Hofstede, 2001). GNP per capita is negatively related to power distance and uncertainty avoidance but positively correlated with individualism (Hofstede, 1980a). Hence, it can be concluded that the higher a country’s level of wealth, the lower it scores on power distance and uncertainty avoidance. However, a country’s wealth makes its inhabitants independent, leading to a highly individualistic national culture (Steenkamp, 2001).

In the context of this study, we use the GDP per capita instead of the GNP per capita since the quality of GDP data is usually superior to the quality of data for GNP (Tang & Koveos, 2008). Moreover, the GDP is more frequently utilized for the comparison of levels of economic prosperity among countries (Brezina, 2012).

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3. Theoretical Framework

3.1 National Culture and Income Inequality

The generation of income is largely based on rewards, which in turn are determined by HRM practices and policies (Groß, 2009; Khan & Riskin, 2005). In the literature, there is empirical evidence that managerial practices like HRM vary not only by contextual factors like firm size or industry but also by national culture (Gerhart & Fang, 2005; Newman & Nollen, 1996; Aycan, 2005). In particular, HRM activities such as rewarding are dependent on a country’s cultural value systems and thus cross-national differences in wage compensation practices can be explained by national culture (Dowling, Festing & Engle, 2008; Schuler & Rogovsky, 1998). Hence, the influence of national culture on wage compensation practices is an important aspect in order to explain differences in levels of income inequality among

countries. Some national cultures foster a more equal distribution of income within a society, whereas others support a more unequal distribution (Hui et al., 1991; Ramamoorthy & Carroll, 1998; Triandis, 2001; Segalla et al., 2006). According to the literature, specifically Hofstede’s national cultural dimensions can be directly associated with particular wage compensation practices that result in either a more compressed distribution of wages or a wider wage dispersion.

First, concerning the relationship between a country’s level of power distance and wage compensation practices, the literature argues that in high power distance cultures, people instead of jobs are valued, which leads to a widely dispersed wage structure within a country (Aycan, 2005; Black, 2001). While low power distance cultures pursue to achieve a distribution of power as equal as possible, people in high power distance cultures are willing to accept both an unequal distribution of power and a hierarchical system within a country without even claiming any justification (Griffith et al., 2014). This hierarchical system leads

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to increased organizational layers and greater wage differences between subordinates and superiors in the different layers (Gomez-Mejia & Welbourne, 1991). This in turn results in inequalities concerning opportunity, status and wealth in countries with high scores of power distance (Hofstede, 2001).

According to the literature, it can be argued that individuals in high power distance cultures who accept unequal distributions of power likewise incline to tolerate an unequal distribution of income in their country without any further justification. Similarly, the hierarchical structure of a high power distance culture fosters inequalities in income. Furthermore, wage compensation practices that are based on individual performance and hierarchy level, also lead to greater wage differences within the society. This leads to the assumption that high power distance countries feature high levels of income inequality.

Support for this argumentation can be found in the study conducted by Malinoski (2012), who likewise argues that a culture which appreciates hierarchy and which accepts power inequalities, tends to have social imbalances such as income inequality. More formally, the following hypothesis can be assumed:

Hypothesis 1 (H1): Power distance positively influences income inequality.

Second, a high degree of individualism indicates that employees are rewarded on the basis of performance-related remuneration and thus receive individual commission based on the equity principle, which leads to a wide dispersion of wages, resulting in an unequal distribution of income (Aycan, 2005; Cable & Judge, 1994; Leung, 1997). Consequently, wage compensation systems in individualistic cultures tend to emphasize individual rather than group outcomes and incorporate extrinsic rewards in order to appreciate employees’ success (Gomez-Mejia & Welbourne, 1991). In a more collectivist culture, by contrast, compensation and rewards are team-based and values like equality and respect in reward distribution are stressed (Aycan, 2005; Ramamoorthy & Carroll, 1998). There would be hence

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a more equal allocation of rewards than in an individualistic culture (Hui et al., 1991). Employees in individualistic cultures rather take care of themselves and do not put much emphasis on values such as cohesiveness, unfairness and inequity, which are fundamental considerations of a more equal distribution of income. Consequently, wage differences in individualistic cultures are more significant than those in collectivist cultures (Triandis, 2001).

In view of these considerations from the literature, it can be claimed that individualistic cultures which are characterized by individual performance related

compensation systems incline to have a wide dispersion of wages. Moreover, individuals that are selfish are likely to rather demand more resources for themselves than accepting an equal distribution of resources for the benefit of the whole society. Therefore, high degrees of individualism within a country tend to rather support large variations in wages, leading to high levels of income inequality.

Similarly, Malinoski (2012) argues that typical inhabitants of an individualistic culture prefer their own interests to the interests of the community. In an individualistic culture, individuals tend to employ their resources as a means to differentiate themselves from others, while others within the society struggle to earn enough to live on. Individuals would never allocate their resources for the public good (Malinoski, 2012). Hence, countries that have high levels of individualism, are likely to have higher levels of income inequality. These

considerations result in the second hypothesis, which states that highly individualistic countries have high levels of income inequality:

Hypothesis 2 (H2): Individualism positively influences income inequality.

Third, in a culture with high degrees of masculinity, values like competition, achievement and success are stressed and individuals strive towards being the best in their field (Hofstede, 1980b). Employees are willing to make an effort in order to enhance their individual performance if they have been granted a higher remuneration (Hunnes, 2009).

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Black (2001) finds that in masculine cultures, firms tend to have a wide dispersion of wages. This could be attributable to the gender stereotypes that are prevalent and rigid in countries with high levels of masculinity, leading to a common acceptance of gender inequalities (Gomez-Mejia & Welbourne, 1991). Wage compensation practices thus incorporate the different treatments of men and women within the society. On the one hand, men are for instance rewarded with promotions if they show a good performance. Women, on the other hand, can experience supportive wage compensation and employment models like paid maternity leave and part-time work (Gomez-Mejia & Welbourne, 1991).

The literature states that people in countries with masculine cultures are paid

according to different compensation systems, leading to an unequal distribution of wages and hence income among the society. Moreover, monetary incentives for individuals further foster a competitive environment in which personal interests are put before the interests of the community. Similar to individualistic cultures, it can be assumed that individuals in masculine cultures are more concerned about their personal well-being than about the overall welfare of the society. Hence, countries scoring high on masculinity are likely to be characterized by large differences in income, which leads to the proposition that those countries have high levels of income inequality.

In accordance with this conclusion, Malinoski (2012) states that due to the neglecting of values like overall welfare and high quality of life for everyone, countries with masculine cultures tend to have large differences in income among the population. This is also

attributable to the fact that individuals in those cultures put more emphasis on competition and ambition (Malinoski, 2012). The following hypothesis assumes that countries with masculine cultures exhibit high levels of income inequality:

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Fourth, in countries scoring high on uncertainty avoidance, wage compensation systems are clearly specified, bureaucratic and centralized in order to ensure administrative consistency among all employees (Gomez-Mejia & Welbourne, 1991). Wage compensation systems are mainly based on seniority instead on incentives, providing a certain degree of certainty and predictability (Schuler & Rogovsky, 1998; Gooderham et al., 1999). Since variable pay systems are avoided in those cultures, a negative relationship between uncertainty avoidance and the ratio of variable to total wage compensation is expected

(Gomez-Mejia & Welbourne, 1991; Tosi & Greckhamer, 2004). Therefore, individuals with a low willingness to accept uncertainty and risk prefer fixed pay systems over contingent pay systems. This is due to the assumption that reward in contingent pay systems is primarily conditional on individuals’ performance but also on factors that are beyond their control, which may lead to the possibility of losing a share of one’s reward (Cable & Judge, 1994). On the contrary, people in a country with low levels of uncertainty avoidance are likely to be venturesome and are encouraged to perform risky investments (Huang & Sternquist, 2007). This in turn may lead to large wage differences between individuals within a country. Furthermore, low levels of uncertainty avoidance indicate the implementation of wage compensation systems based on individual performance and skills, which are considered as less certain and predictable (Schuler & Rogovsky, 1998). These performance-based

compensation systems in turn result in a high dispersion of wages within a country.

The literature argues that cultures with high levels of uncertainty avoidance are usually characterized by fixed pay systems not depending on individual performances. These pay systems aim at maintaining consistency among employees, leading to the assumption that in cultures with high uncertainty avoidance income is relatively equally distributed among the population. Consequently, it can be expected that cultures scoring high on uncertainty

avoidance have lower levels of income inequality than cultures with low scores on uncertainty avoidance.

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Malinoski (2012) also predicts a negative impact of uncertainty avoidance on income inequality. Inhabitants of countries with high levels of uncertainty avoidance incline to undertake secure investments, which foster a more equal distribution of income among individuals in the society (Malinoski, 2012). High uncertainty avoidance cultures thus show low levels of income inequality, resulting in hypothesis 4:

Hypothesis 4 (H4): Uncertainty avoidance negatively influences income inequality.

Finally, wage compensation systems in long-term oriented societies have a futuristic orientation and recognize long-term results more than short-term results, focusing employees’ attention on long-term goals (Balkin & Gomez-Mejia, 1990). Moreover, managers of firms in long-term oriented cultures are more likely to implement fixed wage compensation plans rather than pay for performance plans based on incentives. By using this sort of parity compensation, they secure employees’ cooperation or even their submission Therefore, managers are able to control their employees’ behavior (Segalla et al., 2006). Managers who operate in short-term oriented cultures, by contrast, make wage compensation contingent on results, which lead to the implementation of a more differentiated remuneration system. Incentive compensation according to the equity rule motivates employees to perform best in order to achieve short-term goals and to receive the largest share of wage compensation (Segalla et al., 2006).

Based on these considerations, wage compensation systems in long-term oriented cultures mainly consist of fixed pay systems that implement a more uniform distribution of income within the society. Instead of promoting short-term goals by using individual incentives, which in turn foster a more unequal distribution of income, the focus is more on term results. Therefore, it can be hypothesized that countries with high scores on long-term orientation feature a relatively equal distribution of income and hence low degrees of income inequality.

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Likewise, Malinoski (2012) claims that people that are part of a culture with high levels of long-term orientation are more likely to prepare themselves for the future than people in short-term oriented societies. This means that they save larger parts of their income, which in turn may lead to a decrease of the gap between the rich and the poor, resulting in a more compressed distribution of wages (Malinoski, 2012). More formally, hypothesis 5 states that long-term oriented cultures foster low levels of income inequality within the country:

Hypothesis 5 (H5): Long-term orientation negatively influences income inequality.

3.2 Moderating Effect of National Wealth

Previous literature claims that a country’s level of national wealth has an impact on both national culture and income inequality. Several studies provide empirical evidence that national wealth or a country’s economic development affects its level of income inequality (Kuznets, 1955; Ram, 1991; Galor & Zeira, 1993; Alderson & Nielsen, 1999; Chang & Ram, 2000; Thornton, 2001). Though, there are different statements as to whether income

inequality is positively or negatively influenced by national wealth. Some researchers even find a non-linear relationship between the two variables.

Furthermore, as already stated in section 2.4 of this thesis, previous studies find evidence that national wealth influences national culture. However, it is only associated with three of the five national cultural dimensions investigated, namely power distance,

individualism and uncertainty avoidance. It can be expected that the circumstance whether a country is rich or poor provides the basis for certain cultural characteristics that foster or lessen the degree of income inequality. In the following, the last three hypotheses thus concentrate on possible moderating effects of national wealth, measured as GDP per capita, on the relationship between (1) power distance and income inequality, (2) individualism and income inequality and (3) uncertainty avoidance and income inequality. Since this study is the

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first which examines a possible moderating effect on the relationship between national culture and income inequality, there exist no examples from previous studies which could illustrate the following assumptions.

First, national wealth negatively influences a country’s score on power distance, which means that richer countries have lower levels of power distance (Hofstede, 1980a). Countries with lower levels of power distance in turn pursue to achieve a distribution of income as equal as possible and individuals are not willing to accept inequalities and tend to claim justification for income inequalities (Griffith et al., 2014). Moreover, low power distance cultures incline to avoid both hierarchical systems and a multitude of organizational layers that lead to large wage differentials between the different layers (Gomez-Mejia & Welbourne, 1991). This in turn results in a relatively equal distribution of opportunity, status and wealth in countries with low scores of power distance (Hofstede, 2001).

According to the literature, it can be argued that individuals in countries with high levels of national wealth, are likely to refuse to accept income inequality and put emphasis on an equal distribution of income within the society. Similarly, the flat hierarchy of a low power distance culture, which is assumed to be prevalent in rich countries, further fosters an equal income distribution. As a result, it is assumed that rich countries exhibit low levels of both power distance and hence low levels of income inequality. It can be therefore concluded that national wealth weakens the positive impact of power distance on income inequality. This leads to the hypothesis that high levels of a country’s wealth negatively moderate the positive relationship between power distance and income inequality:

Hypothesis 6 (H6): The positive relationship between power distance and income inequality is moderated by national wealth, so that this relationship is weaker for higher values of national wealth.

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Second, Hofstede (1980a) ascertains that national wealth has a positive impact on individualism within a country, indicating that rich countries are characterized by highly individualistic cultures. According to the literature and as already stated in section 3.1 of this thesis, in countries with high scores on individualism, wage compensation systems are usually based on individual performance, leading to a wide dispersion of wages among the population (Aycan, 2005; Cable & Judge, 1994; Leung, 1997). Due to a focus on individual outcomes and self-interests, individuals tend to neglect the interests of the community and rather claim more resources for their own benefit than for the benefit of the public good (Gomez-Mejia & Welbourne, 1991; Malinoski, 2012). Consequently, this can cause high wage differences or more specifically high levels of income inequality within the society (Triandis, 2001).

Based on these considerations from previous literature, it can be assumed that rich countries provide the basis for strong individualistic characteristics of a culture. High scores on individualism in turn result both in wage compensation systems based on individual performance and in selfish behaviors of individuals, which foster the degree of income inequality within those countries. Consequently, a high level of national wealth seems to strengthen the positive influence of individualism on income inequality. This results in hypothesis 7, which claims a positive moderating effect of national wealth on the positive relationship between individualism and income inequality:

Hypothesis 7 (H7): The positive relationship between individualism and income inequality is moderated by national wealth, so that this relationship is stronger for higher values of national wealth.

Finally, a country’s level of uncertainty avoidance is negatively influenced by its level of national wealth (Hofstede, 1980a). Rich countries therefore incline to have low scores of uncertainty avoidance. As already mentioned in the previous section, countries with low uncertainty avoidance tend to be characterized by contingent wage compensation systems that

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are based on incentives and individual performance (Schuler & Rogovsky, 1998; Gooderham et al., 1999). Additionally, wage compensation systems are decentralized, which leads to a low administrative consistency among all employees (Gomez-Mejia & Welbourne, 1991). Individuals with low uncertainty and risk avoidance are not afraid of the possibility of losing a share of one’s reward, which is associated with contingent pay systems. This risk of loss is attributable to the fact that contingent pay systems are not only dependent on individual performances but also on factors that are beyond individuals’ control (Cable & Judge, 1994). Furthermore, inhabitants of low uncertainty avoidance countries are likely to be venturesome and perform risky investments, which in turn may result in large wage differences between individuals within a country (Huang & Sternquist, 2007).

Consequently, the literature shows that rich countries provide the basis for low uncertainty avoidance characteristics of a culture. Those low uncertainty avoidance characteristics in turn foster the implementation of wage compensation systems such as contingent pay systems that lead to a wide dispersion of wages and thus to high degrees of income inequality within those countries. Moreover, risky investments of individuals in those cultures are additional drivers of large wage differences among the population. It can be hence expected that high levels of national wealth weaken the hypothesized negative effect of

uncertainty avoidance on income inequality.

Therefore, the final hypothesis, which argues that national wealth has a negative moderating effect on the relationship between uncertainty avoidance and income inequality, can be derived:

Hypothesis 8 (H8): The negative relationship between uncertainty avoidance and income inequality is moderated by national wealth, so that this relationship is weaker for higher values of national wealth.

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3.3 Conceptual Model

The hypotheses discussed in the two previous sections result in the conceptual model as represented graphically in the following Figure 1.

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4. Data and Methods

4.1 Sample and Data Collection

This research project is an explanatory quantitative study that is based on a cross-sectional research design in order to investigate the impact of Hofstede’s national cultural dimensions on income inequality comprising national wealth as a moderator. We obtained quantitative data for the empirical testing of proposed hypotheses from several secondary data sources, whereby the Dimension Data Matrix available at Geert Hofstede’s personal website (www.geerthofstede.com) provided both the starting point and the fundamental secondary data source for this analysis. Although this database contains data for all five dimensions of national culture for 110 countries and regions, this study disregards geographical regions and focuses instead on individual countries. We complemented missing values on power distance, individualism, masculinity, uncertainty avoidance and long-term orientation with data

available at the Hofstede Centre’s website (www.geert-hofstede.com), which is endorsed by Geert Hofstede. All data are based on Hofstede’s latest published book Cultures and

Organizations 3rd_{edition 2010 and can be therefore considered as the most recent available}

data on these national cultural dimensions. Scores on each of the dimensions are usually within a 100-point frame but in a few cases there are also scores above 100 (Hofstede, 2015). Additionally to Hofstede’s Dimension Data Matrix, the SWIID Version 5.0 represents the second fundamental data source of this study. This database was released in October 2014 and provides comparable data for the Gini coefficient for 174 countries from 1960 until today (Solt, 2014). We complemented some missing Gini coefficients for certain countries with data from the World Bank database.

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After excluding those countries from the initial data set for which no Gini coefficient, as an indicator of income inequality, is obtainable by none of the databases, the final sample consists of 97 countries all of which are listed in Appendix 1.

4.2 Measures

4.2.1 Dependent Variable

Income inequality. The dependent variable of this study is income inequality. The observation

of income inequality is commonly developed from the progress of the annual values of the Gini coefficient of inequality, which is an aggregated distribution measure with values between 0 and 100, where 0 signifies perfect equal distribution and 100 represents perfect unequal distribution (Solt, 2009). The Gini coefficient can be calculated as the area between the Lorenz curve and the 45 degrees line divided by the area below the 45 degrees line (Milanovic, 1994; The World Bank, 2011). The 45 degrees line is also called total equality line since the income distribution curve would be a straight line if there is complete income equality (The World Bank, 2011). Graphically, the Lorenz curve of income distribution represents the cumulative percentage of income on the vertical axis against the cumulative population share on the horizontal axis (The World Bank, 2011). Specifically, it plots which share of the population obtains which percentage of the total income. Countries that have higher Gini coefficients are characterized by more hierarchical income dispersions (Bloom, 1999).

For each country, the most recent annual Gini coefficient is taken primarily from the SWIID Version 5.0. Values for certain countries’ Gini coefficients that were not accessible through the SWIID were added from the World Bank database.