Income Distribution and Aggregate Saving: A Non‐Monotonic Relationship

Drawing on a panel of advanced economies, this paper documents a concave and non‐monotonic link between inequality and the aggregate household saving rate. We find that, at a low level of inequality, more inequality is associated with higher saving; but we also show that a negative relationship between inequality and saving prevails where inequality is high. Using different empirical approaches, we locate the turning point, where the marginal effect of inequality turns from positive to negative, at a net income Gini coefficient of around 30. Moreover, we show that the relationship between inequality and saving also depends on financial market conditions. While inequality increases saving, when credit is scarce it tends to reduce saving at high levels of credit. This paper primarily focuses on household saving, yet we also find some evidence for a non‐monotonic effect of inequality on private saving, national saving, and the current account balance.     

The effect of growth volatility on income inequality

This paper assesses the long-run effect of growth volatility on income inequality using a comprehensive panel of annual U.S. state-level data during the 1945 to 2004 period. Using the pooled mean group (PMG) estimator, we find evidence supporting the hypothesis that larger growth volatility positively and significantly associates with higher income inequality. Our key finding is robust to alternative lag structures, conditioning variables, inequality measures, volatility indicators, time periods, and panel estimators. Our key finding does change for asymmetric effects, where larger growth volatility positively and significantly associates with higher income inequality only for positive economic growth. The volatility effect proves positive, but insignificant, for negative economic growth.     

A refinement of the relationship between economic growth and income inequality

There is mixed evidence in the literature of a clear relationship between income inequality and economic growth. Most of that work has focused almost exclusively on developed economies. In what we believe to be a first effort, our emphasis is solely on developing economics, which we classify as high-income and low-income developing countries (HIDC and LIDC). We make such distinction on theoretical and empirical grounds. Empirically, the World Bank has classified developing economies in this manner since 1978. The data in our sample are also supportive of such classifications. We provide theoretical scaffolding that uses asymmetric credit constraints as a premise for separating developing economies in such a way. We find strong evidence of a negative relationship between income inequality and economic growth in LIDC to be in stark contrast with a positive inequality–growth relationship for HIDC. Both correlations are statistically significant across multiple econometric specifications. Using international data from 1960 to 2010, this article explores the effect of income inequality on economic growth using dynamic panel technique, such as system generalized method of moments (GMM) that is believed to mitigate endogenous problem. These results are strikingly contrasting to the previous estimation results of Forbes (2000) displaying significant positive correlation between two variables in the short to medium term.     

In search of thresholds in the household income inequality–growth relationship

This paper investigates the shape of the relationship between household income inequality and economic growth. More precisely we search for the existence of threshold values in this relationship by employing a dynamic panel smooth transition regression model to account for potential endogeneity problems. We find that there do exist threshold values (that are different for different groups of countries): below the threshold, household income inequality is growth enhancing, while above the threshold, inequality has a negative or no effect on economic growth.     

Fluctuations in convex models of endogenous growth, I: Growth effects

Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies finding a positive relationship, while others find a negative one. Our objectives are to understand how fundamental uncertainty affects the long run growth rate and to identify important factors determining this relationship in a convex endogenous growth model. Qualitatively, we show that the relationship between volatility in fundamentals (or policies) and mean growth can be either positive or negative. The curvature of the utility function is a key parameter that determines the sign of the relationship. Quantitatively, an increase in uncertainty always increases the growth rate in our calibrated models. Though the changes we find are nontrivial, they are not large enough by themselves to account for the large differences in growth rates observed in the data. We also find that differences in the curvature of preferences have very substantial effects on the estimated variability of stationary objects like the consumption–output ratio and hours worked. For this reason, we expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.     

Income inequality and education revisited: persistence,endogeneity and heterogeneity

This article presents new results on the relationship between income inequality and education expansion – that is, increasing average years of schooling and reducing inequality of schooling. When dynamic panel estimation techniques are used to address issues of persistence and endogeneity, we find a large, positive, statistically significant and stable relationship between inequality of schooling and income inequality, especially in emerging and developing economies and among older-age cohorts. The relationship between income inequality and average years of schooling is positive, consistent with constant or increasing returns to additional years of schooling. While this positive relationship is small and not always statistically significant, we find a statistically significant negative relationship with years of schooling of younger cohorts. Statistical tests indicate that our dynamic estimators are consistent and that our identifying instruments are valid. Policy simulations suggest that education expansion will continue to be inequality reducing. This role will diminish as countries develop, but it could be enhanced through a stronger focus on reducing inequality in the quality of education.     

Inequality and growth: What comes from the different inequality measures?

The objective of the paper is to verify if income inequality impedes the growth rates in OECD countries in the period of 1990–2014 and to reveal whether the choice of the income inequality measure determines the sign and the strength of the estimated relationship. We use system GMM to estimate parameters of a dynamic panel growth model. The research indicates that income inequality negatively affects economic growth. We also find evidence that various measures of inequality bring the different scale of consequences for economic growth, with measures that give more weight to the middle part of the distribution being the weakest predictor of GDP growth. Simultaneously, we present the test of weak instruments, which helps to explain these differences.     

Dynamics of the growth–inequality nexus in China: roles of surplus labor,openness, education,and technical change in province-panel analysis†

The paper examines the complex interrelationship between economic growth and the urban–rural income inequality in China by estimating a simultaneous equation system. This study uses a panel data-set that covers 29 provinces from 1988 to 2007, and compares the earlier period with the later period. It finds a robust and positive impact of the rural surplus labor on urban–rural inequality, which is consistent with Lewis’ dual economy theory. Economic growth is found to aggravate the urban–rural inequality in the earlier period, but there is no hard evidence in the later period. This implies that China has not yet, or at least by 2007, entered the second stage of the Kuznets curve. We also find no robust evidence on the impact of the inequality on growth in either period, but find robust evidence on the impact of both foreign direct investment and exports on the increasing inequality during the earlier period, whereas no significant impact in the later period is found. Finally, the spread of education reduced the inequality in the earlier period, but no such impact is robust in the later period.     

A panel analysis of income inequality and energy use

This paper investigates the relationship between energy consumption and income inequality in an unbalanced panel of 144 countries over the period 1990–2018. Using fixed effect and instrumental variable panel methods and controlling for other determinants of inequality, I find a large and strong negative relationship between energy use and income inequality. The paper also demonstrates that results hold for models which divide the total sample into subsamples of economic blocs and regions. In addition, greater energy use reduces the income share of the top 10% and increases the share of the bottom 40%.     

中国经济增长与收入差距关系的经验研究

经济增长与收入差距的关系是一个古老而又充满活力的问题。研究发现,尽管全国总量时序数据的Granger因果关系检验表明,中国的经济增长与收入差距不存在任何方向的因果关系,但以各省GDP增长率和城乡收入比为观测点的面板数据检验结果显示:不论是在短期还是在长期,收入差距的扩大都是引起经济增长的Granger原因;经济增长在短期会引起收入差距的扩大,但从长期看,有助于收入差距的缩小。     

Effects of longevity and dependency rates on saving and growth: Evidence from a panel of cross countries

While earlier empirical studies found a negative saving effect of old-age dependency rates without considering longevity, recent studies have found that longevity has a positive effect on growth without considering old-age dependency rates. In this paper, we first justify the related yet independent roles of longevity and old-age dependency rates in determining saving and growth by using a growth model that encompasses both neoclassical and endogenous growth models as special cases. Using panel data from a recent World Bank data set, we then find that the longevity effect is positive and the dependency effect is negative in savings and investment regressions. The estimates indicate that the differences in the demographic variables across countries or over time can well explain the differences in aggregate savings rates. We also find that both population age structure and life expectancy are important contributing factors to growth.     

The Kuznets Curve: What Happens After the Inverted-U?

Recent research has posited that, in advanced economies, there is a positive correlation between in- come inequality and development. Using a new unbalanced panel dataset for 71 countries from 1961 to 1992, we present evidence that supports this conjecture. Although many factors may be contributing to this renewed positive relationship between growth and inequality, one plausible explanation rests on the shift away from a manufacturing base towards a service base in most advanced economies.     

SMEs,Growth, and Poverty: Cross-Country Evidence

This paper explores the relationship between the relative size of the Small and Medium Enterprise (SME) sector, economic growth, and poverty alleviation using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 45 countries, we find a strong, positive association between the importance of SMEs and GDP per capita growth. The data do not, however, confidently support the conclusions that SMEs exert a causal impact on growth. Furthermore, we find no evidence that SMEs alleviate poverty or decrease income inequality.     

Federalism,Fertility, and Growth

This paper analyses the effect of federalism on fertility and growth. In a model with human capital accumulation and endogenous fertility, two regimes of education finance are compared: central and local. I find that local education finance yields higher growth at the price of increased inequality. The effect of federalism on total and differential fertility rates depends on the elasticity of substitution between children and consumption. The paper also empirically examines the relationship between fertility rates and fiscal decentralisation on a panel of OECD countries and finds a weak negative effect of decentralisation on total and differential (poor minus rich) fertility.     

Did the German Minimum Wage Reform Influence (Un)employment Growth in 2015? Evidence from Regional Data

Using the variation across space, age and sex and the variation across space and sectors, we analyse the relationship between the minimum wage and (un)employment growth in 2015. We use difference‐in‐differences specifications and instrument the bite of the minimum wage by the lagged bite. The results provide stable evidence that a higher minimum wage bite is related to a higher growth rate of regular employment. We also find stable evidence that a higher minimum wage bite is related to a lower growth rate of marginal employment. These results are consistent with a transformation of marginal to regular jobs. The relationship to total employment is slightly positive in our preferred specification but insignificant or negative in others. For unemployment, we find a positive relationship between the bite of the minimum wage and unemployment growth in our preferred specification but insignificant or negative results in others.     

Entrepreneurship and income inequality: a spatial panel data analysis

The main objective of this paper is to empirically analyze the relationship between entrepreneurship and income inequality. We use a spatial panel data analysis for both 33 high-income countries and 39 middle- and low-income countries over a period of 11 years. Estimation results and rigorous diagnostic analysis suggest that: (i) there is a strong support for the existence of an inverted U-shaped relationship between entrepreneurship and income inequality espoused by the Kuznets Curve hypothesis; (ii) the relationship between entrepreneurship and income inequality is negatively moderated by country’s level of economic development; (iii) regardless of income inequality levels, entrepreneurship has a non-linear relationship with income per capita; (iv) gross domestic expenditure on research and development exhibits significant negative impacts on entrepreneurship; (v) significant mixed effects on the likelihood of entrepreneurial activity are observed with governance, globalization, population growth rate, and competitiveness variables; (vi) there are significant mixed feedback effects on entrepreneurship; and (vii) there are statistically significant, positive as well as negative spatial spillovers to country-level entrepreneurial activity.     

Inclusive institutions,unequal outcomes: Democracy,state capacity,and income inequality

Although the relationship between democratic rule and income inequality has received important attention in recent literature, the evidence has been far from conclusive. In this paper, we explore whether the redistributive effect of democratic rule is conditional on state capacity. Previous literature has outlined that pre-existing state capacity may be necessary for inequality-reducing policies under democratic rule. In contrast to that intuitive view, this study argues that democratic rule and high state capacity combined produce higher levels of income inequality over time. This relationship operates through the positive effect of high-capacity democratic context on foreign direct investment and financial development. By making use of a novel measure of state capacity based on cumulative census administration, we find empirical support for these claims using fixed-effects panel regressions with the data from 126 industrial and developing countries between 1970 and 2013.     

Income inequality and economic growth

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.     

The energy consumption-real GDP nexus revisited: Empirical evidence from 93 countries

In this paper, we analyse the long-run relationship between energy consumption and real GDP for 93 countries. We find mixed results on the impact of energy consumption on real GDP, with greater evidence at the country level supporting energy consumption having a negative causal effect on real GDP. For the G6 panel of countries, we find significant evidence that energy consumption negatively Granger causes real GDP. This means that for countries where energy consumption has a negative long-run causal effect on real GDP, energy conversation policies should not retard economic growth. We identify these countries and regional panels. We argue that these countries/regions should play a greater role in reducing carbon dioxide emissions.     

Does domestic financial development enhance the linkages between foreign direct investment and economic growth?

The study examines the relationship between foreign direct investment (FDI), financial development, and economic growth in a panel of 95 developed and developing countries from 1983 to 2006. The study moves away from the traditional cross-sectional analysis, and focuses on more direct evidence of the channels via which FDI might help or retard economic growth. Using generalized method of moment (GMM) panel data analysis, we find strong evidence of a positive relationship between FDI inflows into a country and its economic performance. We also find evidence that domestic financial system is a significant prerequisite for FDI to have a positive effect on economic growth. Policy implications are clear. Effort should be made to reform and improve the development of domestic financial system in order to benefit more from the presence of FDI.