Is it the Income Distribution or Redistribution that Affects Growth?

Abstract:     
This study addresses the central question in political economy how the objectives of attaining welfare and restricting income inequality are related to each other. Thus far few studies scrutinise whether income inequality as such, or the redistributing public interventions to equalise incomes affect economic growth. This study aims to fill this gap using a panel design covering 30 OECD countries. Taking into account the limited data availability, this study finds a negative association between redistribution and growth that remains significant when the level of inequality is held constant. No evidence is found for a relationship between income inequality and growth. This finding is in line with the trade-off hypothesis, holding that redistribution limits the financial incentives to gain wealth, leading to lower output growth. Yet, the found association is small, and a causal interpretation of the negative association between redistribution and growth does not seem to be warranted.

Number of Pages in PDF File: 30

Keywords: income inequality, redistribution, economic growth, trade-off

JEL Classification: O11, E25, H23

working papers series