Do Rising Top Incomes Spur Economic Growth? Evidence From OECD Countries Based on a Novel Identification Strategy

Helmut Herwartz and Yabibal Walle

Review of Income and Wealth, 2020, vol. 66, issue 1, 126-160

Abstract: We investigate the causal relationship between the growth rate of top income shares and economic growth in 12 OECD economies for the period 1950–2010. To analyze patterns of short‐ and long‐run causality, we build upon recent advances in structural‐vector autoregressive modeling of non‐Gaussian systems. This framework allows us to discriminate between rival transmission channels by means of dependence tests, since independent shocks are unique for a particular causation pattern. We consider the share of income accruing to the top 1 percent (T1), to the next 9 percent (T9), and to the top decile (T10). While structural models display considerable heterogeneity across countries, mean group and pooled results strongly favor a specific transmission pattern. In particular, T1 has a long‐run positive impact on economic development. This result, which is also confirmed by identified impulse‐response functions, is particularly evident for the post‐1980 period.

Date: 2020
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