A Reassessment of the Relationship between Inequality and Growth
American Economic Review · 2000 · Volume 90 · Issue 4
Abstract
This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality, which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.
Keywords
Economic Development: Human Resources, Human Development, Income Distribution, Migration, Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence
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