A Reassessment of the Relationship between Inequality and Growth
Posted: 15 Feb 2000
This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant, country-specific effects and therefore eliminates a potential source of omitted variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.
JEL Classification: E25, O15, O40
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