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Inequality and growth: Goal conflict or necessary prerequisite?

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Author Info
Cecilia García-Peñalosa (CNRS and GREQAM, Marseille, Office number 322, Vieille Charité, 2 rue de la Charité, 13236 Marseille)

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Abstract

In this paper I discuss recent theories on the relationship between growth and inequality, and ask whether the two move together or not. Output growth can be due to increases in either physical capital, human capital,the labour supply or the level of technology, and I argue that each of these represents a mechanism that relates our two variables of interest. The literature indicates that there are two difficulties in answering the question. The first concerns causation, since inequality affects growth, growth impacts distribution, and third factors have an effect on both. The second is the fact that, depending on the source of growth, inequality and growth may be positively or negatively related. This means that we have to be much more precise in the way in which we ask the question. On the one hand, we need to identify the particular source of growth before we can assess how it relates to inequality. On the other, different dimensions of inequality have different impacts. Both the theory and the empirical evidence indicate that inequality at the top of the distribution does not have the same effect as inequality at the bottom.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 147.

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Length: 51 pages
Date of creation: 08 Sep 2008
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Handle: RePEc:onb:oenbwp:147

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  17. Daniele Checchi & Cecilia García-Peñalosa, 2008. "Labour market institutions and income inequality," Economic Policy, CEPR, CES, MSH, vol. 23, pages 601-649, October. [Downloadable!] (restricted)
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  31. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June. [Downloadable!] (restricted)
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