Inequality, inequality of opportunity, and growth: what are we talking about? Theory and empirical (original) (raw)

Inequality of Opportunity and Economic Growth: A Cross-Country Analysis

Policy Research Working Papers, 2014

Income differences arise from many sources. While some kinds of inequality, caused by effort differences, might be associated with faster economic growth, other kinds, arising from unequal opportunities for investment, might be detrimental to economic progress. We construct two new metadata sets, consisting of 118 household surveys and 134 Demographic and Health Surveys, to revisit the question of whether inequality is associated with economic growth and, in particular, to examine whether inequality of opportunity-driven by circumstances at birth-has a negative effect on subsequent growth. Results are suggestive but not robust: while overall income inequality is generally negatively associated with growth in the household survey sample, we find no evidence that this is due to the component we attribute to unequal opportunities. In the DHS sample, both overall wealth inequality and inequality of opportunity have a negative effect on growth in some of our preferred specifications, but the results are not robust to relatively minor changes. On balance, although our results are suggestive of a negative association between inequality and growth, the data at our disposal does not permit robust conclusions as to whether inequality of opportunity is bad for growth.

Inequality of opportunity and growth

Journal of Development Economics, 2013

Theoretical models and empirical studies exploring the relationship between income inequality and growth reach a disappointing inconclusive answer. We postulate in this paper that one reason for this inconclusive result is that income inequality consist at least in two different sorts of inequality, inequality of opportunity and effort. These two types of inequality would affect growth through opposite channels. As a result, the relationship between income inequality and growth could be positive or negative depending on which kind of inequality is more relevant. We test this proposal using depurated data of the PSID database for 24 US states from 1980 to 2000. We estimate regressions that relate growth with overall income inequality, inequality of opportunity and other widespread used control variables. We find robust support for a negative relationship between inequality of opportunity and growth and a positive relationship between growth and income inequality.

Effects of income inequality on the economic growth of Brazilian states

International Journal of Social Economics, 2018

Purpose The purpose of this paper is to investigate the effects of income inequality on the economic growth of Brazilian states in the period from 1994 to 2014. The transmission mechanism of the effects of income inequality on economic growth is derived from the model proposed by Halter et al. (2014). Design/methodology/approach The empirical formulation adopted to achieve this goal is divided into two stages. The first stage is limited to short-term analysis, and panel data models with fixed effects, random effects, and instrumental variables are used. In the second stage, the discussion turns to the use of the error correction model for a cointegrated panel. Findings The findings of this study suggest that inequalities in income and educational level are the principal determinants of different growth rates among Brazilian states. More specifically, it is found that additional years of schooling positively influence growth. By contrast, income inequality negatively affects this ind...

Household Income Inequality and Economic Growth in Brazil

This paper investigates the relationship between household income inequality and economic growth in Brazil controlling for a large number explanatory variables, which were divided into three groups: individuals' inherent characteristics, individuals' acquired characteristics and a set of characteristics related to the economic environment of the country. Using the household income concept to urban areas only, the methodological econometric framework was based upon simultaneous equation models applied in cross-sectional data for brazilian states with some extensions to different income percentiles. The results corroborate with some studies, but contradict several others, concerning labor market segmentation, discrimination and access to education and their impacts over inequality, but shows relevant effects about government intervention. It is also found that some of those particular variables affect in different ways the income inequality in each income percentile.

Inequality and Growth: Uncovering the Main Conclusions from the Empirics

Journal of Development Studies, 2014

The theme of the relationship between inequality and economic growth has gained considerable attention among economists over the last two decades. In this paper, we analyse the effect of inequality on growth, whose related literature has been producing inconclusive results. After an exhaustive study of the major empirical works in this specific research area, we are able not only to advance with some potential explanations for the apparent lack of consensus on the empirical assessment of the inequality-growth relationship, but also to achieve a better understanding of the nature of this relationship and the forces underlying it. We conclude that the disparities found in the results of the estimation of the reduced-form relationship are most likely due to three dimensions: differences in the estimation techniques, the countries and the periods included in the sample, and the variable used to measure inequality. The last two aspects have particularly important implications. First, country/region specificities play a crucial role in the relationship between inequality and growth, so more emphasis should be put on the estimation of such a relationship on a national/regional basis, rather than trying to establish universal patterns. Second, the time horizon of the analysis should be carefully chosen, as different transmission channels from inequality to growth tend to operate differently in the short and in the long-run. Third, the fact that inequality in wealth distribution has a stronger negative effect on growth than inequality in income distribution may indicate that the channels through which inequality affects growth are not the same in both distributions. Therefore, we argue that in order to produce an accurate assessment of both the reduced-form relationship and the underlying transmission channels these aspects should be accordingly considered, which has not been the case in most of the empirical literature.

Income inequality and economic growth: A re‐examination of theory and evidence

2018

We re-examine the theoretical and empirical relationship between income inequality and economic growth in an endogenous growth model with a at tax on income, distributive conflicts among agents and median voter dynamics. We show that when government spends tax revenue on the provision of public goods in the form of both production and consumption services, the theoretical relationship between inequality and economic growth is neither strictly positive nor strictly negative but that it is ambiguous. An empirical evaluation of the theoretical findings is done by applying a semi-parametric model on a sample of 55 low-income, lower-middle-income, upper-middle-income and high-income countries for the period 1980 to 2010. Results show that the relationship between income inequality and growth takes the form of an inverted-U shape in that income inequality initially has a positive impact on growth up to an average Gini coefficient threshold of 35.92 beyond which it negatively impacts on gr...

Inequality and Growth Re-Examined

Technology and Investment, 2012

This paper examines the relationship between income inequality and subsequent economic growth. It builds on the model suggested by Alesina and Rodrik (1994) in which inequality works through greater demands for redistribution to slow down growth, and the idea by Ray (1998) that inequality negatively affects savings, work capacity, economic incentives, and access to and efficiency of credit and financial markets. Using an updated dataset and seven model variants, both OLS and 2SLS regressions find a strong negative effect of income inequality on future growth. The effect is considerably stronger for developing countries, but the existence or absence of democracy has no effect on either the relationship between inequality and growth or on the rate of growth itself. There is also no support for Barro's (2008) claim that inequality impacts growth positively in developed countries.