The Effect of Pay-For-Performance Compensation and Wealth Derived Income on the Growth-Income Inequality Relation in the US

Abstract

The paper analyzes the relation between growth and income inequality in the US during the post-war years (1953–2008). We show that the income of the top income groups is more sensitive to growth, defined broadly as current growth and changes in expectations of future growth, compared to the income of the lower income groups. This increased sensitivity arises for two reasons: the top income groups receive a large portion of their income from wealth, which is more sensitive to growth than labor income, and the top income groups receive a large portion of their labor income in the form of skill-based performance pay, which is also sensitive to growth. Consequently, we conclude that growth and income inequality are positively associated.

Keywords: GDP, growth, income inequality, stock market return

JEL Classification: E240, F430, G190