The Effect of Immigration on Income Distribution : A Comparative Study of Ordinary Least Squares and Beta Regression

Abstract: The purpose of this study is to estimate the relationship between income inequality and immigration in Sweden. To do so, data from the data base Kolada with observations from all 290 municipalities in Sweden is used. As a proxy for income distribution the Gini coefficient is used and as a proxy for immigration the share of foreign born of working age is used. The model also controls for income tax, education level and unemployment level. The dependent variable the Gini coefficient is bounded by a unit interval and it is therefore not possible to simply run a linear regression. Such a model could potentially predict outside the interval. To properly estimate the relationship two approaches are made. Firstly a model is estimated with Ordinary Least Squares (OLS) after the dependent variable is transformed on to the real line through log-odds. Then a model is estimated using beta regression. The study concludes that there is a statistically significant positive correlation between income inequality and immigration in Sweden. The OLS estimated model shows that a 1 unit increase in immigration, on average increases the log-odds of 0.28336 units, ceteris paribus. Beta regression provides perhaps more intuitive results. If immigration increases with 1% the income inequality increases with on average 0.1046%, ceteris paribus. Because of the easier interpretation, among other things, beta regression is determined to be a better estimation method in this study.