This work finds that countries where income inequality is decreasing grow faster than those with rising inequality. The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key:
The role that income inequality plays in economic growth has also received quite a bit of attention in policy circles and the press recently.
The IMF has weighed in with a discussion on the role of income distribution as a cause and consequence of economic growth see, for example, Ostry et al. In a recent paper Brueckner and Ledermanwe provide estimates of the within-country effect that income inequality has on aggregate output.
Our empirical analysis starts from the premise that the effect of changes in income inequality on GDP per capita may differ between rich and poor countries. This premise is grounded in economic theory. In a seminal contribution, Galor and Zeira proposed a model with credit market imperfections and indivisibilities in investment to show that inequality affects GDP per capita in the short run as well as in the long run.
How large are the effects? Our empirical analysis shows that for the average country in the sample duringincreases in income inequality reduce GDP per capita.
Specifically, we find that, on average, a 1 percentage point increase in the Gini coefficient reduces GDP per capita by around 1. To be clear, this finding implies that, on average, increases in the level of income inequality lead to lower transitional GDP per capita growth.
Increases in the level of income inequality have a negative long-run effect on the level of GDP per capita. We document the robustness of this result to alternative measures of income inequality, alternative income inequality data sources, splitting the sample between pre- and post period end of the Cold Warand restricting the sample to countries located in Latin America and the Caribbean or Asia.
Quantitatively, the size of the coefficient on the interaction term implies that differences in initial income induce a substantial effect on the impact that changes in income inequality have on GDP per capita.
For example, at the 25th percentile of initial income the predicted effect of a 1 percentage point increase in the Gini coefficient on GDP per capita is 2. The estimates from the interaction model thus suggest that in poor countries, increases in income inequality raise GDP per capita while the opposite is the case in high- and middle-income countries.
Furthermore, within-country increases in income inequality significantly increase human capital measured by the average years of schooling and share of the population with a secondary and tertiary education in poor countries.
On the other hand, in high- and middle-income countries increases in income inequality reduce human capital. Identification Identification of the causal effect of income inequality on aggregate output is complicated by the endogeneity of the former variable. We address this issue by estimating a panel model with country and time fixed effects.
We instrument income inequality with variation in that variable not driven by GDP per capita building on the work of Brueckner et al. Conclusion Our empirical analysis is motivated by the theoretical work of Galor and Zeira Instrumental variables estimates showed that income inequality has a significant negative effect on aggregate output for the average country in the sample.
However, for poor countries income inequality has a significant positive effect. We document that this heterogeneity is also present when considering investment — in particular, investment in human capital — as a channel through which inequality affects aggregate output.
Overall, our empirical results provide support for the hypothesis that income inequality is beneficial to economic growth in poor countries, but that it is detrimental to economic growth in advanced economies.
The findings, interpretations, and conclusions expressed are entirely those of the authors. Unfortunately, data on wealth inequality are not available to generate a long time-series for a large number of countries. As noted in previous empirical research e.
Perottiincome inequality and wealth inequality are highly positively correlated.Download the latest Gender Inequality Index Data View the GII Frequently Asked Questions. Gender inequality remains a major barrier to human development.
“One of the regrettable, if diverting, effects of extreme inequality is its tendency to weaken the capacity for impartial judgment. It pads the lives of its beneficiaries with a soft down of consideration, while relieving them of the vulgar necessity of justifying their pretensions, and secures that, if they fall, they fall on cushions.”.
Galor and Zeira’s model predicts heterogeneity in the effects of inequality on aggregate output across countries' initial income levels. Taking this prediction seriously, our econometric model included an interaction between measures of income inequality and countries' initial level of GDP per capita.
Gender Inequality in the World and Its Implications Cornhusker Economics January 14, Gender Inequality in the World and Its Implications Worldwide one in three women will be abused sexually or will encounter physical violence during her lifetime (Human Development Report (HDR), ).
With issues of economic inequality becoming more prominent, a "5 Facts" primer. Nov 14, · Over the past 40 or so years, the American economy has been funneling wealth and income, reverse Robin Hood-style, from the pockets of the bottom 99 .