How does income inequality affects economic growth at different income levels?

Chengfang Shen and Xindong Zhao

Economic Research-Ekonomska Istraživanja, 2023, vol. 36, issue 1, 864-884

Abstract: To address the slowdown in growth from an inequality perspective, this study applies a comprehensive dataset with strong comparability and a dynamic panel threshold model to explore the effect of income inequality on economic growth, its channels of influence, and differences in channels due to country differences, considering income level differences and country differences. The study finds that whilst inequality impedes growth in the general growth framework, this impediment becomes insignificant when the fertility rate or country differences are controlled for. Second, the impeding effect of inequality on growth occurs at low-income levels rather than at high-income levels. Finally, in the low-income stage, inequality tends to impede growth through channels that reduce the level of human capital and political stability and increase fertility, rather than through channels that affect investment, and the channels vary slightly by the country's economic systems, religious beliefs, and saving habits. This study suggests that at the low-income stage, the government should appropriately increase the proportion of labour compensation, improve the redistribution system, encourage the development of charity, and establish a sound social donation system.

Date: 2023
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DOI: 10.1080/1331677X.2022.2080742

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