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Neoclassical Inequality

Daniel Carroll and Eric Young ()

No 201432R2, Working Papers from Federal Reserve Bank of Cleveland

Abstract: In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.

Keywords: growth; elasticity of substitution; inequality (search for similar items in EconPapers)
JEL-codes: D31 D33 D52 E21 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2017-09-06
New Economics Papers: this item is included in nep-mac
Note: *First version posted December 2014 under the title, “The Piketty Transition”; a revised paper of the same title was posted in April 2015. This paper is an expanded version of part of the original paper.
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Journal Article: Neoclassical inequality (2018) Downloads
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DOI: 10.26509/frbc-wp-201432r2

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