Why Low Inequality Spurs Growth: Savings and Investment by the Poor
22 Pages Posted: 20 Apr 2011
Date Written: August 1996
New empirical evidence suggests that high levels of income inequality constrain rather than encourage growth. While some explanations involve relationships between inequality and political systems, this paper focuses on the microeconomic behavior of poor households. When returns to labor are sufficiently high, poor households can intensify their work effort to generate additional income that in turn provides funds for high-return investments; under these circumstances the marginal propensity to save from this additional income may be exceptionally high. Increased savings and investment among the poor can, in turn, simultaneously reduce poverty and income inequality and stimulate growth. The model developed in this paper is applied to human capital investment in Brazil and Korea from 1960 to 1990.
Suggested Citation: Suggested Citation