Income shares, wealth and growth

2008

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible-that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices-rapid economic growth and low income inequality-can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.

Most of the research on the relation between economic growth and income distribution has concentrated on the well-known Kuznets inverted-U hypothesis which claims that economic growth initially worsens income inequality and then it improves it. A few studies have argued that income inequality could also affect economic growth through its impact on saving and investment. In this paper, we use time-series data from 18 developing countries along with the bounds testing approach and investigate bi-directional causality between economic growth and a measure of income inequality. We find that while there is short-run bi-directional causality in most countries, the long-run causality is limited to less than half of the countries in the sample.

This paper is a literature review on the recent Post-Keynesian empirical findings about the effect of income distribution on investment and growth in a variety of different countries and aims at discussing the policy implications of this literature. The core question is the following: Are actual economies wageled or profit-led? Current orthodoxy implicitly assumes that they are profit-led, and thus supports the neoliberal policy agenda. The merit of the Post-Keynesian/Kaleckian models is that they highlight the dual function of wages as a component of aggregate demand as well as a cost item. If an economy is not profit-led, then there is room for policies targeting growth and income distribution simultaneously. However, the economies are indeed dynamic in the sense that beyond a point an economy can shift from a wage-led to a profit-led regime, with an intensified distributional conflict.

2013

While a great deal of attention has been given to the interaction between income distribution and economic growth using heterodox macroeconomic models, most of this analysis has used twoclass models of distribution with workers and capitalists which conflate concepts of personal and functional distribution. Recent discussions of increases in inequality have drawn attention to changes in income distribution due to wage inequality, rather than only to changes in the functional share of labor. This has led to the development of some models with more than three classes, introducing different kinds of labor to analyze income distributional changes. This paper examines some issues concerning different concepts of inequality and distribution, including functional, vertical and horizontal ones. It then uses a simple two-group framework to analyze the determinants and growth implications of income distributional changes involving vertical inequality to develop simple models following classic...

Cambridge Journal of Economics, 2013

The interaction between economic growth and income distribution is examined using Kaleckian/post-Keynesian models in which there are lags in investment and in which the dynamics of income distribution between wages and profits depends on changes in power relations in both the labour market and goods market. By examining these two influences on distributional dynamics simultaneously, the relative strength of which can change over the growth process, it is shown that the growth-distributional dynamics can involve non-linearities, multiple equilibria and instability. The implications of policy-induced changes-including those in macroeconomic policy and labour market and antitrust policies-on aggregate demand and distribution are examined for both wage-led and profit-led growth regimes.

The Gap between Rich and Poor, 2019

2012

This paper investigates whether the relationship between income inequality and growth changes over time. Two time periods, covering 1970-1985 and 1985-1999, are analyzed and compared. A statistically significant relationship between inequality and growth in either time period fails to emerge. However, there are indications that effect of inequality on growth may be different in the nineties when compared to the seventies. In the literature, a consistent negative effect of inequality on growth is documented although the significance of the effect is open to debate. This paper also finds a negative effect of income inequality on growth in the seventies but, although statistically insignificant, a consistently positive effect in the nineties.

Annales. Etyka w Życiu Gospodarczym

Inequality of income is one of the significant factors forming social capital. Two views dominate among economists dealing with the influence of income inequality on economic growth. On the one hand, a too low level of income inequality does not motivate people to increase their labour productivity. Low inequality of income might result from an extended social care system and a GDP burdened with social transfers. A good example may be a situation when an unemployed person refuses to accept a job offer and prefers unemployment benefits to a slightly higher salary. Moreover, a lack of incentives for an employee who fails to acknowledge the economic sense of increasing the productivity of his or her work might lead to a slower growth of the economy. On the other hand, a contrary view suggests that an increase in inequality of income has a negative impact on the economy. The accumulation of wealth by a small number of citizens raises doubts about the good use of that wealth for the inve...

Physica D: Nonlinear Phenomena, 2022

Understanding the statistical dynamics of growth and inequality is a fundamental challenge to ecology and society. Recent analyses of wealth and income dynamics in contemporary societies show that economic inequality is very dynamic and that individuals experience substantially different growth rates over time. However, despite a fast growing body of evidence for the importance of fluctuations, we still lack a general statistical theory for understanding the dynamical effects of heterogeneneous growth across a population. Here we derive the statistical dynamics of correlated growth rates in heterogeneous populations. We show that correlations between growth rate fluctuations at the individual level influence aggregate population growth, while only driving inequality on short time scales. We also find that growth rate fluctuations are a much stronger driver of longterm inequality than earnings volatility. Our findings show that the dynamical effects of statistical fluctuations in growth rates are critical for understanding the emergence of inequality over time and motivate a greater focus on the properties and endogenous origins of growth rates in stochastic environments.

Auf allen Märkten zu Hause, 2006

This paper investigates the relationship between income distribution and growth through the demand composition channel within an endogenous growth model. Assuming non-homothetic preferences and non-homogeneous goods, personal income distribution affects the patterns of demand of households and therefore the supply of firms, which in turn determines growth. It is shown that high inequality is harmful for growth. The theoretical results are verified by using data from the German EVS-Database. The results suggest that income distribution strongly affects households' patterns of demand. Besides there is some evidence that demand composition influences factor returns and productivity, which in turn determine income growth.

Development and Comp Systems, 2004

The econometric analysis of economic growth has always been subject to major flaws and shortcomings. Data scarcity and reliability, parameter heterogeneity, omitted variables bias, endogeneity problems, ... have seriously tainted estimation results. In this paper we propose an alternative framework that explicitly deals with these issues. We investigate the relation between income inequality and economic growth in a number of OECD countries in a cointegrated VAR-setting. Our results suggest that different models seem to hold for different countries. However, for most countries the imperfect markets model better describes reality than the complete markets model.

Journal of Evolutionary Economics

The explosion generated by the global financial crisis in 2008 and its transmission to the real economies have been interpreted as calling for new kinds of regulation of the banking and the financial systems that would have allowed reestablishing a virtuous relation between the real and the financial sectors of the economy. In this paper we maintain a different view, that the financial crisis and the ensuing real crisis have roots in the strong increase in income inequality that has been taking place in the Western world in the last thirty years or so. This has created an all around aggregate demand deficiency crisis that has strongly reduced prospects and opportunities for investments in productive capacities and shifted resources toward other uses, thus feeding a perverse relation between the productive and the nonproductive assets of the economy. In this context the way out of the crisis is reestablishing the right distributive conditions, which cannot be obtained by a policy aimed at relieving the weight of private or public debts but calls for a redistribution through taxes on the incomes of non-productive sectors, a fine tuning that should prevent excessive taxations transforming positive into negative effects.

Entropy

Increasing wealth inequality is a significant global issue that demands attention. While the distribution of wealth varies across countries based on their economic stages, there is a universal trend observed in the distribution function. Typically, regions with lower wealth values exhibit an exponential distribution, while regions with higher wealth values demonstrate a power-law distribution. In this review, we introduce measures that effectively capture wealth inequality and examine wealth distribution functions within the wealth exchange model. Drawing inspiration from the field of econophysics, wealth exchange resulting from economic activities is likened to a kinetic model, where molecules collide and exchange energy. Within this framework, two agents exchange a specific amount of wealth. As we delve into the analysis, we investigate the impact of various factors such as tax collection, debt allowance, and savings on the wealth distribution function when wealth is exchanged. Th...

Economics Letters, 2004

For three different specifications of a crosscountry growth model, the coefficient of initial income inequality is remarkably similar for high-and low-income countries, contrary to some recent suggestions in the literature, but varies markedly across models.

The central theme of this paper is the character and causes of long term changes in the personal distribution of income. Does inequality in the distribution of income increase or decrease in the course of a country's economic growth? What factors determine the secular level and trends of income inequalities? These are broad questions in a field of study that has been plagued by looseness in definitions, unusual scarcity of data, and pressures of strongly held opinions. While we cannot completely avoid the resulting difficulties, it may help to specify the characteristics of the size of income distributions that we want to examine and the movements of which we want to explain. Five specifications may be listed. First, the units for which incomes are recorded and grouped should be family-expenditure units, properly adjusted for the number of persons in each-rather than income recipients for whom the relations between receipt and use of income can be widely diverse. Second, the distribution should be complete, i.e., should cover all units in a country rather than a segment either at the upper or lower tail. Third, if possible we should segregate the units whose main income earners are either still in the learning or already in the retired stages of their life cycle-to avoid complicating the picture by including incomes not associated with full-time, full-fledged participation in economic activity. Fourth, income should be defined as it is now for national income in this country, i.e., received by individuals, including income in kind, before and after direct taxes, excluding capital gains. Fifth, the units should be grouped by secular levels of income, free of cyclical and other transient disturbances.