Does economic growth create more or less equality?

  • $\begingroup$ Its not a clear-cut one-directional relationship a google search of "lecture notes growth and inequality" turns up quite a lot of info $\endgroup$ – Grada Gukovic Jul 22 '19 at 9:24
  • $\begingroup$ Do you mean income (in)equality or wealth (in)equality? $\endgroup$ – user161005 Dec 15 '20 at 16:19
  • $\begingroup$ Income (in)equality includes rents and profits from wealth $\endgroup$ – sba222 Dec 15 '20 at 22:01

More often than not economic growth will increase wealth and income inequality. This is because wealth is not uniformly distributed across the population, with a small percentage controlling a large share of the worlds wealth.

This small percentage of people tend to hold wealth in income-generating assets such as shares in top companies. This means that when the economy is during well and experience high economic growth, companies will be making a lot of profit. This profit is then paid out to their shareholders. This can increase inequality.

However, it's possible for government policies to break the link between economic growth and rising inequality. One way governments do this is with progressive taxes, where people with a higher income also face a higher tax rate. Another policy is inheritance tax rich limits the ability of rich parents passing on their wealth onto their children

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    $\begingroup$ (-1) 1. you are mixing wealth and income inequality - literature clearly shows they are driven by different factors. 2. Empirical evidence clearly shows very little overall relationship between inequality and economic growth (see Barro, 2000). 3. Empirically evidence clearly shows that there is no much relationship between economic growth and capital share of income which was virtually constant during last century (a period of significant growth) which does not support the simplistic story about profits/income generating wealth (see Acemoglu 2008 introduction to Modern Economic Growth). $\endgroup$ – 1muflon1 Dec 17 '20 at 18:25
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    $\begingroup$ 4 You do not discuss any literature which actually shows what the drives of inequality are. Namely literature shows a lot of income inequality is driven by globalization and international wage completion, superstars (using the word in econ jargon not meaning just Hollywood), information technology, growth of financial service sector, institutional changes (unions), scaling back redistributive policies (see Atkinson 2015 Inequality), associative mating etc. little of which depend on growth. 5. If anything wealth inequality is driven by low growth rates (see Piketty Capital in the 21st century) $\endgroup$ – 1muflon1 Dec 17 '20 at 18:34
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    $\begingroup$ 6 Progressive taxation can help alleviate inequality but it can’t necessarily affect link between growth and inequality. If growth would drive inequality then it would not stop driving it because of wealth or income tax. Progressive income tax and inheritance tax can reduce income and wealth inequality but don’t necessarily change relationships between it and growth. They are all post market income policies. 7 What about famous Chamley-Judd result which shows that in long run all capital taxes are shifted onto labor? 8 You omit consumption inequality yet it’s considered important by literature $\endgroup$ – 1muflon1 Dec 17 '20 at 18:40
  • $\begingroup$ I actually thought @Hardy was thinking of Piketty. From Wikepedia: Piketty's work focuses on public economics, in particular income and wealth inequality. He is the author of the best-selling book Capital in the Twenty-First Century (2013),[3] which emphasises the themes of his work on wealth concentrations and distribution over the past 250 years. The book argues that the rate of capital return in developed countries is persistently greater than the rate of economic growth, and that this will cause wealth inequality to increase in the future. $\endgroup$ – Jesper Hybel Dec 17 '20 at 22:18
  • $\begingroup$ @JesperHybel yes but under Piketty (which is still controversial by the way) it is the lack of growth that causes inequality. The argument is not that r>g always holds in fact in some chapter he even mentioned that reduction in inequality occurred during periods when r<g, but he claims that r is always stable - whereas growth rates tend to fluctuate and also argues that in current low growth situation it is likely that r>g most of the time. But note this is exactly opposite argument the post above makes - if you take Piketty at face value high growth (g>r) means less inequality not more $\endgroup$ – 1muflon1 Dec 17 '20 at 22:47

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