Income inequality refers to disparities in the distribution of income, that is, the gap between the rich and the poor in a country. The perspective of the new growth theories the harvard community has made this article openly available. This paper traces chinas growth story and the contributing role of education and training. For example, returns to education and differentiation in labor earnings can spur human capital accumulation and economic growth, despite being associated with higher income inequality. Economic growth means an increase in national income, but does economic growth actually help to reduce relative poverty and income inequality or can economic growth exacerbate existing income inequalities. Pdf this article reveals a complex and multidimensional effect of inequality on growth. At the other end of the scale, four nordic countries and switzerland all have comparatively low labour income inequality because wage dispersion is narrow and employment rates are high. Download pdf income inequality and economic growth free. This column argues that greater income inequality raises the economic growth of poor countries and decreases the growth of high and middle income countries. This is partly because the extraordinary growth in top incomes has been going along with an economic slowdown. Income inequality, tax policy, and economic growth article pdf available in the economic journal 127601. The purpose of this paper is to study the relationship between inequality and growth using a panel of income distribution data that covers the 48 states of the. The remainder of the paper is organized as follows. Income inequality and economic growth mo 2000 kyklos.
Countries differ widely with respect to the level of labour income inequality. To do this, it is necessary to take into account two aspects. Because of increasing trade among countries, workers in richer. Optimal taxation, economic growth and income inequality in the united states lowering the tax rate to 19. The second part of the survey will analyze the way. Does inequality in the distribution of income increase or decrease in the course of a countrys economic growth. The relationship between income inequality and economic growth can be examined from the results of fig. A global perspective prepared by era dablanorris, kalpana kochhar, frantisek ricka, nujin suphaphiphat, and evridiki tsounta. Using comparable data on disposable income from the luxembourg income study, results suggest that inequality at the top end of the distribution is positively associated with growth, while inequality lower down the distribution is negatively related to. For instance, the world bank group has included among its key global. Perotti 1996 reports an overall tendency for inequality to generate lower economic growth in crosscountry regressions.
Pdf the impact of income inequality on economic growth. New data set on growth, poverty and income distribution to test these relationships, and to more accurately pinpoint the impact of economic growth on poverty and inequality, it is necessary to construct a new empirical data set. The relationship between income inequality and economic. Economic growth, income inequality and poverty reduction. Inequality can also influence growth positively by providing incentives for innovation and entrepreneurship lazear and rosen 1981, and, perhaps especially relevant for developing. In the paper, our aim rests on the relationship between economic inequality and economic growth, but different from others, we will also study the relationship between inequality and economic growth in the situation where consideration of effect of factor movement is included. Results from instrumental variables regressions show that in low income countries transitional growth is.
Studies of income inequality and economic growth have been well conducted by many other scholars and organizations. Inequality and economic growth 1617 impact of growth upon inequality. The relationship between aggregate output and income inequality is central in macroeconomics. This study therefore seeks to contribute to the existing knowledge on the level of growth inequality nexus in nigeria by analyzing the trend in the trajectory of inequality and economic growth in nigeria. And, is the relationship between inequality and economic growth related to the level of. Poverty, income inequality and economic growth economics. Higher inequality at the top end of the distributi on may promote economic growth, a s it boosts the overall level o f savings available for investment.
The role of initial income by markus brueckner and daniel lederman key words. Some degree of inequality may not be a problem insofar as it provides the incentives for people to excel, compete, save, and invest to move ahead in life. The new oecd analysis found a negative and statistically significant correlation between income inequality and economic growth. Introduction the relationship between economic growth and the distribution of income is an important topic in macroeconomics. The longterm rise in income inequality in the oecd area 8. He argued that the relationship between economic development and income inequality is humpshaped. Economic growth during the past twenty years has been closely associated with three phenomena. In 1920, relative poverty may have been an income of less than. Dec 09, 2014 specifically, the 3 gini point rise in inequality that was the average for oecd states over the last 20 years meant 0. Labour income inequality is largely shaped by differences in wage rates, hours worked and inactivity. Using both standard fixed effects and gmm estimations, this. The theoretical ambiguities do, in a sense, accord with empirical findings, which tend not to be robust.
We find that a high level of inequality reduces gdp growth, but its. The results in this paper, when regressing gini to gdp. Nevertheless, panizza argues that political instability, imperfect capital markets, and redistribution pressure could be a reasoning behind a negative relationship. Nonetheless, this issue is still far from resolved and, as explained in this article, the answer to the question of how unequal household income affects a countrys growth is still not clear, both from a theoretical and also empirical perspective. Poverty, income inequality and economic growth economics help. The starting point for the theoretical literature on the relationship between growth and income inequality is the kuznets hypothesis. Reducing income inequality while boosting economic growth. To speak to those debates, this paper provides estimates of the relationship between income inequality and gdp per capita for.
Income inequality and economic growth international. Does the profile of income inequality matter for economic growth. A simple theoretical synthesis beenlon chen institute of economics, academia sinica, 128 academic road, section 2, taipei 11529, taiwan email. The role that income inequality plays in economic growth has also received quite a bit of attention in policy circles and the press recently. We estimate a panel model where the relationship between inequality and gdp per capita growth depends on countries initial incomes. The second group second group of research are based on mediumterm analysis of inequality and growth using panel or longitudinal data li and zou 1998, atkinson et al 2011 3. Kennedy used the metaphor of a rising tide that lifts all boats to explain the idea that growth is good for the poor as well as the rich.
This thesis performs two regressions, one for 19701980 and another for 19801990, to see if the relationship between inequality and the average annual growth rates changed. There exists many mixed theories and beliefs on how, if at all, income inequality and economic growth relate. The relationship between economic growth and income inequality. Abstract to reduce income inequality, governments adopt various policies. Capital in the twentyfirst century is a 20 book by french economist thomas piketty. Trends in income inequality and its impact on economic growth. The great rise of inequality let us start by examining the ongoing trends in income and wealth. A substantial literature analyzes the effects of income. Inequality and growth december 2014 directorate for employment, labour and social affairs does income inequality hurt economic growth. However, contrary to the predictions of the kuznets hypothesis, piketty and saez 2003 found that since the 1970s income inequality has deteriorated markedly in the united states. Corporations are often blamed for putting profits ahead of workers. Impact of inequality on economic growth in this context, person and tabellini 1994 conducted a study on the relationship between inequality and growth in the case of 56 countries, nine of which are developed during the postwar period. Human capital accumulation is an important channel through which income inequality affects growth.
It also demonstrates that the tradeoff between growth and inequality can be explained in. Does the profile of income inequality matter for economic. A regional perspective shibalee majumdar and mark partridge egalitarianism refers to the doctrine of the equality of mankind and the desirability of political, economic and social equality. The relation between economic growth and income inequality has long been a subject of debate. The impact of income inequality on economic growth bertelsmann. The effect that income inequality has on economic growth has recently received. To motivate the extension of this framework to income inequality, i begin by discussing recent theoretical analyses of the macroeconomic consequences of income inequality. The relationship between income inequality and economic growth in oecd countries, including south korea hyuntak lee, m. We define economy i and economy ii as the economy with high progressive tax and low progressive tax. The relationship between economic growth and inequality has been studied by economists for more than a century. Top end inequality appears to have a positive effect on growth while inequality further down the income distribution appears to be inversely related to growth. Specifically, the 3 gini point rise in inequality that was the.
This paper tests the robustness of the crosscountry results to the use of a more accurate crossstate dataset. New oecd research shows that when income inequality rises, economic growth falls. And it shows that, far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance. Inequality, poverty and economic growth sciencedirect. Does inequality in the distribution of income increase or decrease in the course of a countrys economic.
However, as economies grow richer, further growth brings about a decline in inequality. Income inequality and economic growth download income inequality and economic growth ebook pdf or read online books in pdf, epub, and mobi format. Contrary to the risingtide hypothesis, the rising tide has only lifted the large yachts, and many of the smaller boats have been left dashed on the rocks. The causes of economic inequality seven pillars institute. The relationship between aggregate output and the distribution of income is an important topic in macroeconomics galor 2011. However, the direct impact of income inequality on the rate of productivity growth accounts for more than 55 percent of its overall total effect. Total market income, which also includes capital employment and selfincome, is more concentrated than labour earnings. The third group of studies includes the panel data analysis of the correlation between. Trade economist paul krugman supports the proposition that globalization is an important cause of inequality. Income inequality, tax policy, and economic growth. Jul 17, 2015 concentrate on fostering economic growth since income inequality will eventually take care of itself as the economy continues to develop. Cash transfers tend to be universal and are thus less redistributive. Thus, this disposition further contributes within the field of regional economics. Then i develop the applied framework and describe the new empirical findings.
Comparative evidence for subsaharan africa prepared by dalia hakura, mumtaz hussain, monique newiak, vimal thakoor, and fan yang1 authorized for distribution by celine allard june 2016 abstract a growing body of empirical evidence suggests that inequalityincome or gender relatedcan. Optimal taxation, economic growth and income inequality in. The effects of economic growth on income inequality in the us. This paper uses a crossstate panel for the united states to assess the relationship between inequality and growth. May 08, 2017 globalizations rise in recent decades has widened income inequality in the u. Review of the literature on the relationship between income inequality and economic growth the major economic problem in the world is the fight against poverty. A regional comparative analysis agyemang eric bachelor of arts, university of ghana, 2010 a thesis submitted to the school of graduate studies of the university of lethbridge in partial fulfillment of the requirements for the degree master of arts in economics department of economics.
Crosscountry studies have found a negative relationship between income inequality and economic growth. Globalization boosted income inequality, study says us news. In this article we will discuss about the relation among poverty, inequality and economic growth. Our primary focus is on gender inequality in educational attainment, but it is useful to bring in other measures. In this paper, we are going to refer to the concept of economic equality. The great umbrella of globalization, a product of trade liberalization, now covers every corner in the world. Economic growth, financial development, and income inequality the paper finds that financial development contributes to reducing inequality up to a point, but as financial development proceeds further, it contributes to greater inequality. Pdf income inequality, tax policy, and economic growth. Some studies have found a positive relationship, others a negative relationship while some found no correlation between the two. What factors affect income inequality and economic growth. The effect that income inequality has on economic growth has recently received also quite a bit of attention in policy circles. The empirical relationship reconsidered in the light of comparable data by stephen knowles abstract all of the recent empirical work on the relationship between income inequality and economic growth has used inequality data that are not consistently measured. Economic growth, financial development, and income inequality. With an increase in income inequality, it can be expected that growthpromoting incentives predominate, and that the gross domestic product gdp increases.
Effects of income inequality on economic growth vox, cepr. This is however underscored by lack of easily retrievable data. Economic growth, financial development, and income inequality 15 in columns 79, when the stock market capitalization to gdp ratio is used as the proxy for financial development, there is no evidence of the ushaped effect. Estimates of the model show that the relationship between inequality and gdp per capita growth is significantly decreasing in countries initial incomes. However, reducing income inequality through taxation between median and high. The main problem with the crosscountry analyses is the poor quality of the data on income distribution. An analysis using a panel data article pdf available april 2018 with 1,765 reads how we measure reads. The majority of them point to the conclusion that inequality is detrimental to economic growth. Equitable growth supports research and policy analysis on how trends in economic inequality and mobility and changes in the economy have affected the concentration of wealth, income, and earnings, and how these distributional shifts have affected the promise of economic. Reexamining the links klaus deininger and lyn squire many economists have long believed that income disparities increase in the early stages of development, making the poor relatively worse off. There is mixed evidence in the literature regarding the relationship between income inequality and economic growth. For instance, the world bank group has included among its key global objective for development the eradication of extreme poverty and boosting the incomes of the bottom 40% of developing countries. Widespread increases in income inequality have raised concerns about their potential impact on our societies and economies. This paper investigates the importance of the shape of the income distribution as a determinant of economic growth in a panel of countries.
Its purpose is to observe the impact of income inequality on economic growth in nigeria, examine whether kuznets curve holds and suggest probable and effective policy measures based on the. This paper estimates a panel model in which the relationship between inequality and gross domestic product per capita growth depends on countries initial incomes. A series of studies using crosscountry data all suggest that growth has neither a positive nor a negative effect on inequality. O1 australian national university brueckner and world bank lederman. These asymmetric economic growth effects are attributable both to supply. We are grateful to three anonymous referees and the. Click download or read online button to income inequality and economic growth book pdf for free now.
The debate in economic research stretches back to the work of simon kuznets in the 1950s. Economic and financial development, and income inequality. It focuses on wealth and income inequality in europe and the united states since the 18th century. While most crosscountry studies find a negative relationship between income inequality and economic growth, studies that use panel data suggest the presence of a positive relationship between inequality and growth. In light of this, it argues for a range of policies that would increase both equity and economic wellbeing. Income inequality and economic growth sciencedirect.
In this paper, we investigate the relationships among gender inequality, income, and growth, using data for over 100 countries over the past three decades. Income inequality, economic growth, and the effect of. Pdf this paper examines the relationship between income inequality and economic growth in a broad panel of countries over the period from. Jan 05, 2018 economic growth means an increase in national income, but does economic growth actually help to reduce relative poverty and income inequality or can economic growth exacerbate existing income inequalities. One of most common policies to reduce income inequality is to increase government spending in social welfare. Introduction the share of poor people in the global population has.
Inequality and economic growth northwestern university. This chapter argues in favour of alternative explanations of inequality, with particular reference to the theory of rentseeking and to the influence of institutional and political factors, which have shaped labour markets and patterns of remuneration. Growth and its impact on economic trends in income inequality. Economic growth and income inequality american economic. This indicates that the effects of income inequality on economic growth are much more complicated than what we have perceived or modeled. Income inequality is blamed on cheap labor in china, unfair exchange rates, and jobs outsourcing. Financial sector reforms that reduce market frictions will lower income inequality and boost growth without the potential incentive problems associated with redistributive policies. The relationship between economic growth and income.
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