These findings can broadly be classified into four categories, namely negative, positive, inconclusive and no relationship. On the other hand, greater inequality could increase growth if it provides incentives to work harder and take risks in order to capitalise on high rates of return (Mirrlees 1971). Large differences in rates of return for education might encourage more people to seek education. Greater inequality could foster aggregate savings and capital accumulation, because the rich save relatively more (Bourguignon 1981; Kaldor 1957). Fuentes and Leamer (2019) provide theory and evidence that worker effort has played an important role in the increase in income inequality in the United States between 1980 and 2016.
Studies with inconclusive results on the relationship between income inequality and economic growth
These results show that the relationship depends sasol south africa ltd on the development level of the countries, and the first stage of the political economy channel is supported at UHC (Gründler & Scheuermeyer, 2018). The effect of income inequality on fertility is significantly positive in all estimates, so the prerequisite for the validity of the bi fertility channel supports the Kremer and Chen (2002) study for both country groups. The sensitivity analysis results for political instability and political economy channel at UHC are presented in Table 10.
Studies with evidence of no relationship between income inequality and economic growth
- The primary purpose of this study is to test whether the positive and negative channels specified in theory are valid, rather than the direct effect of income inequality on economic growth.
- Therefore, as stated by Demirguc-Kunt (2012), these countries primarily need stable macroeconomic policies and strong legal and information systems for the development of the financial system.
- Based on the above considerations, researchers should be more cautious when identifying a general global pattern regarding the inequality-growth relationship.
- Since many macroeconomic variables and policy recommendations may differ between the two country groups, different consequences for subsamples are likely to occur in the relationship between income inequality and economic growth.
They do find some mixed evidence that very large-scale redistribution may have direct negative effects on growth duration, but for non-extreme redistributions, there is no evidence of any adverse direct effect. Lula said that the government is working to meet the goal of children being literate at the right age, in a partnership established https://www.easyequities.co.za/ with all states and municipalities. He reinforced the commitment to building another 100 federal institutes and expanding investments in universities, rehabilitating existing ones and building more university hospitals. It will also mean that the government has more money to spend on public services, as tax revenue will increase with rising private incomes. Any economic growth is generally good news for UK households as it means people are getting paid more and companies are seeing higher profits, increasing the chance of new jobs being created.
The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?
The results showed that, in rich countries, inequality positively affected economic growth, while in poor countries it negatively affected growth during the period under study. This means that, for rich countries, as inequality increased, the economy (as measured by Gross Domestic Product GDP per capita) tended to increase as well, while in poor countries, the economy tended to decline as inequality increased. In the models for the https://www.alexforbes.com/ UHC, the lag of GDP per capita is also included as a measure of the initial stage of development to take into account the convergence hypothesis. The result of the control variables in the growth estimates for UHC is slightly different from LLMC.
Studies with negative results on the relationship between income inequality and economic growth
Under the linearity assumption of the saving function, the total saving behaviour in the economy is independent of income and wealth distribution, independence disappears under a non-linear saving function (Stiglitz, 1969). The marginal propensity to save from profits is greater than the propensity to save from wages, and this is the condition of stability. According to this view, known as the classical approach, the marginal propensity to save increases as wealth increases. In this case, resources are transferred to individuals with a high marginal propensity to save, and total savings gradually increase.
Annex B: Implications for GDP per capita in conditional scenarios
Furthermore, as in LLMC, the tertiary as the dependent variable is used to examine credit markets defects and human capital channels. Results for patent are similar to LLMC; contrary to theory, the effect of inequality on the patent is significantly negative in all estimates. Therefore, income inequality does not support innovative activities contrary to expectations, but the same interpretation cannot be made for the saving rate, and the results are different from LLMC. As income inequality rises, saving rates increase (except column 6), these results support the Classical approach. The marginal propensity to save for the rich people in UHC is higher, so total savings increase as inequality increases. As seen in Table 14, while the results are robust for the innovation channel, the negative effect of fixed capital variable on income inequality does not support the Classical approach.
The 3 main scenarios we have looked at all focus on changes in poverty levels between January 2025 and January 2029, conditional on different growth assumptions. These take the OBR Economic and Fiscal Outlook forecasts as their inputs wherever possible (see Annex 1 for detailed source notes), and varies these to create a central scenario and 2 more positive scenarios, which are described below. In contrast, the optimal tax rate can be negative when society cares mostly about inheritors. They conclude that fiscal redistribution, unless it is extreme, may be a win-win policy because of its equality-inducing effects.
