Income inequality, productivity and economic growth
Ezra Oberfield presents a theoretical model to examine the relationship between inequality, measured economic growth, and welfare improvements. The author develops a model with non-homothetic preferences over an infinite continuum of goods while households differ in their endowments of efficiency units of labor. The model includes a progressive tax system that redistributes income. Productivity on the other hand is driven by two factors: a) Exogenous broad-based technology improvements; and b) Good-specific improvements from learning-by-doing proportional to labor used.
Key findings:
- Along a balanced growth path (BGP) with stable income distribution:
– Measured inflation is perpetually higher for low-income households than high-income households.
– Despite this inflation gap, welfare improves at the same rate for all households. - Comparing BGPs with different levels of inequality:
– The BGP with more inequality has lower measured TFP growth
– There is a larger gap in inflation between rich and poor
– However, the rate of welfare improvement is the same across BGPs - Productivity improvements that cause the inflation gap actually ameliorate inequality rather than exacerbate it.
- Standard measures of inflation and productivity growth can be misleading about welfare improvements because:
– They capture benefits of cost reductions for currently consumed goods
– They don’t capture benefits from cost reductions that occur before households shift consumption to those goods. - There is no systematic relationship between measured real income growth and improvements in welfare in the model.
- The model is consistent with recent empirical findings showing faster price increases for goods consumed by low-income households.
The paper argues that observed trends of rising inequality, slowing productivity growth, and differential inflation rates across income groups may be misleading about actual improvements in welfare. It emphasizes the importance of considering long-term shifts in consumption patterns when assessing the welfare impacts of economic growth and inequality.
Inequality and Measured Growth
Author: Ezra Oberfield
From: Princeton University
Wealth inequality and economic growth
Steenbrink and Skali investigate the relationship between wealth inequality and economic growth using panel data from 165 countries over the period 1995-2019. The authors use wealth inequality data from the World Inequality Database (WID), measuring top 1% and top 10% wealth shares and economic growth data from Penn World Tables, measured as annual percentage change in real GDP per capita. Finally, the authors used a dynamic panel data model using system Generalized Method of Moments (GMM) estimator.
Studying income inequality is necessarily limiting: if one is interested in how inequality (broadly defined) affects economic outcomes, then focusing on income disparities will be less informative than examining wealth disparities.
Key findings:
- There is a negative and statistically significant relationship between wealth inequality and economic growth: A one standard deviation increase in wealth inequality is associated with a 0.4 percentage point (17%) decline in growth rates.
- Robustness: Results are robust to various control variables and model specifications and findings hold for both top 1% and top 10% wealth shares.
Wealth Inequality and Economic Growth: Evidence from the World Inequality Database
Authors: Rachel Steenbrink, Ahmed Skali
From: Berenschot, University of Groningen
