Income Inequality and Economic Growth: Heterogeneity and Nonlinearity

Abebe Hailemariam 1  and Ratbek Dzhumashev 1
  • 1 Monash University, Department of Economics, Wellington Rd, Clyaton, VIC, 3800, Australia
Abebe Hailemariam
  • Corresponding author
  • Monash University, Department of Economics, Wellington Rd, Clyaton, VIC, 3800, Australia
  • Email
  • Search for other articles:
  • degruyter.comGoogle Scholar
and Ratbek Dzhumashev
  • Monash University, Department of Economics, Wellington Rd, Clyaton, VIC, 3800, Australia
  • Search for other articles:
  • degruyter.comGoogle Scholar

Abstract

This paper examines the relationship between income inequality and economic growth in a broad panel of countries over the period from 1965 to 2014. We utilize an improved dataset for inequality with reduced measurement errors, which fosters cross-country comparability. In addition, we investigate whether accounting for heterogeneity across countries alters the estimated effect of inequality on growth, and whether the inequality-growth nexus varies with the level of income inequality. Our estimates show that after accounting for heterogeneity, the nonlinear growth effect of income inequality remains statistically and economically significant. We find a threshold effect of inequality on economic growth, and this threshold is higher for developing economies than for developed economies.

  • Alesina, A., and D. Rodrik. 1994. “Distributive Politics and Economic Growth.” The Quarterly Journal of Economics 109 (2): 465–490.

    • Crossref
    • Export Citation
  • Alesina, A., and R. Perotti. 1996. “Income Distribution, Political Instability, and Investment.” European Economic Review 40 (6): 1203–1228.

    • Crossref
    • Export Citation
  • Arellano, M., and O. Bover. 1995. “Another Look at the Instrumental Variable Estimation of Error-Components Models.” Journal of Econometrics 68 (1): 29–51.

    • Crossref
    • Export Citation
  • Atkinson, A. B., and A. Brandolini. 2006. “On Data: A Case Study of the Evolution of Income Inequality Across Time and Across Countries.” Cambridge Journal of Economics 33 (3): 381–404.

  • Atkinson, A. B., and A. Brandolini. 2015. “Unveiling the Ethics Behind Inequality Measurement: Dalton’s Contribution to Economics.” The Economic Journal 125 (583): 209–234.

    • Crossref
    • Export Citation
  • Banerjee, A. V., and A. F. Newman. 1993. “Occupational Choice and the Process of Development.” Journal of Political Economy 101 (2): 274–298.

    • Crossref
    • Export Citation
  • Banerjee, A. V., and E. Duflo. 2003. “Inequality and Growth: What can the Data Say?” Journal of Economic Growth 8 (3): 267–299.

    • Crossref
    • Export Citation
  • Barro, R. J. 2000. “Inequality and Growth in a Panel of Countries.” Journal of Economic Growth 5 (1): 5–32.

    • Crossref
    • Export Citation
  • Benabou, R. 2000. “Unequal Societies: Income Distribution and the Social Contract.” American Economic Review 90 (1): 96–129.

    • Crossref
    • Export Citation
  • Benabou, R. 2002. “Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?” Econometrica 70 (2): 481–517.

    • Crossref
    • Export Citation
  • Benhabib, J. 2003. “The Tradeoff between Inequality and Growth.” Annals of Economics and Finance 4: 491–507.

  • Benhabib, J., A. Bisin, and M. Luo. 2017. “Earnings Inequality and Other Determinants of Wealth Inequality.” American Economic Review 107 (5): 593–597.

    • Crossref
    • Export Citation
  • Brueckner, M., and D. Lederman. 2018. “Inequality and Economic Growth: The Role of Initial Income.” Journal Economic Growth 23 (3): 341–366.

    • Crossref
    • Export Citation
  • Caner, M., and B. E. Hansen. 2004. “Instrumental Variable Estimation of a Threshold Model.” Econometric Theory 20 (5): 813–843.

  • Chen, B. L. 2003. “An Inverted-U Relationship between Inequality and Long-Run Growth.” Economics Letters 78 (2): 205–212.

    • Crossref
    • Export Citation
  • Chudik, A., K. Mohaddes, M. H. Pesaran, and M. Raissi. 2017. “Is there a Debt-Threshold Effect on Output Growth?” Review of Economics and Statistics 99 (1): 135–150.

    • Crossref
    • Export Citation
  • Cingano, F. 2014. Trends in Income Inequality and its Impact on Economic Growth. OECD Social, Employment and Migration Working Papers, No. 163, Paris: OECD Publishing.

  • Durlauf, S. N. 1996. “A Theory of Persistent Income Inequality.” Journal of Economic Growth 1 (1): 75–93.

    • Crossref
    • Export Citation
  • Easterly, W. 2007. “Inequality does Cause Underdevelopment: Insights from a New Instrument.” Journal of Development Economics 84 (2): 755–776.

    • Crossref
    • Export Citation
  • Engerman, S. L., and K. L. Sokoloff. 2000. “History Lessons: Institutions, Factor Endowments,and Paths of Development in the New World.” Journal of Economic Perspectives 14 (3): 217–232.

    • Crossref
    • Export Citation
  • Fernàndez, R., and R. Rogerson. 1996. “Income Distribution, Communities, and the Quality of Public Education.” The Quarterly Journal of Economics 111 (1): 135–164.

    • Crossref
    • Export Citation
  • Forbes, K. J. 2000. “A Reassessment of the Relationship between Inequality and Growth.” American Economic Review 90 (4): 869–887.

    • Crossref
    • Export Citation
  • Galor, O. 2011. “Inequality, Human Capital Formation, and the Process of Development.” In: Handbook of the Economics of Education, edited by Eric A. Hanushek, Stephen Machin and Ludger Woessmann, Vol. 4, North Holland: Elsevier, pp 441–493.

    • Crossref
    • Export Citation
  • Galor, O., and J. Zeira. 1993. “Income Distribution and Macroeconomics.” The Review of Economic Studies 60 (1): 35–52.

    • Crossref
    • Export Citation
  • Galor, O., O. Moav. and D. Vollrath. 2009. “Inequality in Landownership, the Emergence of Human-Capital Promoting Institutions, and the Great Divergence.” The Review of Economic Studies 76 (1): 143–179.

    • Crossref
    • PubMed
    • Export Citation
  • Halter, D., Oechslin, M., and Zweimüller, J. 2014. “Inequality and Growth: The Neglected Time Dimension.” Journal of Economic Growth 19 (1): 81–104.

    • Crossref
    • Export Citation
  • Jenkins, S. P. 2015. “World Income Inequality Databases: An Assessment of WIID and SWIID.” The Journal of Economic Inequality 13 (4): 629–671.

    • Crossref
    • Export Citation
  • Kaldor, N. 1955. “Alternative Theories of Distribution.” The Review of Economic Studies 23 (2): 83–100.

    • Crossref
    • Export Citation
  • Kalecki, M. 1971. Selected Essays on the Dynamics of the Capitalist Economy 1933–1970. Cambridge: Cambridge University Press.

  • Kaplan, G. 2017. “Inequality, Heterogeneity, and Consumption.” Journal of Political Economy 125 (6): 1767–1774.

    • Crossref
    • Export Citation
  • Kennedy, T., R. Smyth, A. Valadkhani, and G. Chen. 2017. “Does Income Inequality Hinder Economic Growth? New Evidence Using Australian Taxation Statistics.” Economic Modelling 65: 119–128.

    • Crossref
    • Export Citation
  • Kremer, S., A. Bick, and D. Nautz. 2013. “Inflation and Growth: New Evidence from a Dynamic Panel Threshold Analysis.” Empirical Economics 44 (2): 861–878.

    • Crossref
    • Export Citation
  • Lee, D. J., and J. C. Son. 2016. “Economic Growth and Income Inequality: Evidence from Dynamic Panel Investigation.” Global Economic Review 45 (4): 331–358.

    • Crossref
    • Export Citation
  • Li, H., and H. F. Zou. 1998. “Income Inequality is not Harmful for Growth: Theory and Evidence.” Review of Development Economics 2 (3): 318–334.

    • Crossref
    • Export Citation
  • Lin, S. C., H. C. Huang, D. H. Kim, and C. C. Yeh. 2009. “Nonlinearity between Inequality and Growth.” Studies in Nonlinear Dynamics & Econometrics 13 (2): 1–18.

  • Lin, Y. C., and C. C. Yeh. 2014. “Inequality-Growth Nexus Along the Development Process.” Studies in Nonlinear Dynamics & Econometrics 18 (3): 237–252.

  • Madsen, J. B., M. R. Islam, and H. Doucouliagos. 2018. “Inequality, Financial Development and Economic Growth in the OECD, 1870–2011.” European Economic Review 101: 605–624.

    • Crossref
    • Export Citation
  • Neves, P. C., and S. M. T. Silva. 2014. “Inequality and Growth: Uncovering the Main Conclusions from the Empirics.” Journal of Development Studies 50 (1): 1–21.

    • Crossref
    • Export Citation
  • Neves, P. C., Ó. Afonso, and S. T. Silva. 2016. “A Meta-Analytic Reassessment of the Effects of Inequality on Growth.” World Development 78: 386–400.

    • Crossref
    • Export Citation
  • Perotti, R. 1996. “Growth, Income Distribution, and Democracy: What the Data Say.” Journal of Economic Growth 1 (2): 149–187.

    • Crossref
    • Export Citation
  • Persson, T., and G. Tabellini. 1994. “Is Inequality Harmful for Growth?” The American Economic Review 84: 600–621.

  • Pesaran, M. H. 1997. “The Role of Economic Theory in Modelling the Long Run.” Economic Journal 107: 178–191.

    • Crossref
    • Export Citation
  • Pesaran, M. H. 2015. “Testing Weak Cross-Sectional Dependence in Large Panels.” Econometric Reviews 34 (6–10): 1089–1117.

    • Crossref
    • Export Citation
  • Pesaran, M. H., and R. Smith. 1995. “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels.” Journal of Econometrics 68 (1): 79–113.

    • Crossref
    • Export Citation
  • Pesaran, M. H., Y. Shin, and R. P. Smith. 1999. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.” Journal of the American Statistical Association 94 (446): 621–634.

    • Crossref
    • Export Citation
  • Piketty, T. 2014. Capital in the 21st Century. Cambridge, MA: Harvard University Press.

  • Saint-Paul, G., and T. Verdier. 1996. “Inequality, Redistribution and Growth: A Challenge to the Conventional Political Economy Approach.” European Economic Review 40 (3–5): 719–728.

    • Crossref
    • Export Citation
  • Shin, I. 2012. “Income Inequality and Economic Growth.” Economic Modelling 29 (5): 2049–2057.

    • Crossref
    • Export Citation
  • Solt, F. 2015. “On the Assessment and use of Cross-National Income Inequality Datasets.” The Journal of Economic Inequality 13 (4): 683–691.

    • Crossref
    • Export Citation
  • Solt, F. 2016. “The Standardizing World Income Inequality Database.” Social Science Quarterly 97 (5): 1267–1281.

    • Crossref
    • Export Citation
  • Venieris, Y., and D. Gupta. 1986. “Income Distribution and Sociopolitical Instability as Determinants of Savings: A Cross-Sectional Model.” Journal of Political Economy 94: 873–883.

    • Crossref
    • Export Citation
  • Voitchovsky, S. 2005. “Does the Profile of Income Inequality Matter for Economic Growth?” Journal of Economic growth 10 (3): 273–296.

    • Crossref
    • Export Citation
Purchase article
Get instant unlimited access to the article.
$42.00
Log in
Already have access? Please log in.


or
Log in with your institution

Journal + Issues

SNDE recognizes that advances in statistics and dynamical systems theory can increase our understanding of economic and financial markets. The journal seeks both theoretical and applied papers that characterize and motivate nonlinear phenomena. Researchers are required to assist replication of empirical results by providing copies of data and programs online. Algorithms and rapid communications are also published.

Search