Income Inequality Metrics - Inequality, Growth, and Progress

Inequality, Growth, and Progress

There is evidence from a broad panel of recent academic studies shows that there is a nonlinear relation between income inequality and the rate of growth and investment. Very high inequality slows growth; moderate inequality encourages growth. Studies differ on the effect of very low inequality.

Robert J. Barro, Harvard University found in his study "Inequality and Growth in a Panel of Countries" that higher inequality tends to retard growth in poor countries and encourage growth in well-developed regions.

In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach slightly different conclusions. The authors therefore recommend to pursue moderation also as to the distribution of wealth and particularly to avoid the extremes. Both very high egalitarianism and very high inequality cause slow growth. Considering the inequalities in economically well developed countries, public policy should target an ‘efficient inequality range’. The authors claim that such efficiency range roughly lies between the values of the Gini coefficients of 0.25 (the inequality value of a typical Northern European country) and 0.40 (that of countries such as the USA, France, Germany and the UK).

Another researcher (W.Kitterer) has shown that in perfect markets inequality does not influence growth.

The precise shape of the inequality-growth curve obviously varies across countries depending upon their resource endowment, history, remaining levels of absolute poverty and available stock of social programs, as well as on the distribution of physical and human capital.