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Inequality and Growth in the 21st Century

Weijie Luo

Discussion Papers from Department of Economics, University of York

Abstract: This paper distinguishes between income inequality induced by differences in labor productivity and induced by differences in capital income. Persson and Tabellini (1994) argue that productivity-induced income inequality leads to lower growth since distortionary taxes increase and harm capital accumulation. However, if income inequality stems from differences in capital income, then labor tax rates fall, leading to higher growth. Using OECD data, increased capital income inequality (proxied by the top 1% income share) has a significant positive relationship with subsequent economic growth. Controlling for capital income inequality yields a negative relationship between labor income inequality and growth, as originally conjectured.

Keywords: capital income; inequality; growth (search for similar items in EconPapers)
JEL-codes: D31 E62 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro and nep-mac
Date: 2017-12
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