INEQUALITY AND GROWTH IN THE UNITED STATES: WHY PHYSICAL AND HUMAN CAPITAL MATTER

We investigate the relationship between economic growth and top income inequality under the influence of human and physical capital accumulation, using an annual panel of U.S. state‐level data. Our analysis is based upon the “unified” framework offered by Galor and Moav (2004) while the empirics account for cross‐section dependence, parameter heterogeneity, and endogeneity, in nonstationary series. We conclude that changes in inequality do not influence growth, neither in the short run nor in the long run in the United States as a whole in the 1929–2013 period. Our findings are robust to the inclusion of overall income inequality measures. These findings provide support for the theoretical prediction of the unified theory of inequality and growth, according to which the growth effect of inequality becomes insignificant in the latest stages of economic development that the United States experiences during our period of investigation. Therefore, future policies aiming at moderating the concentration at the upper end of income distribution are not likely to have adverse growth consequences in developed countries such as the United States. (JEL I21, O47, C23)     

Inequality and growth in advanced economies: an empirical investigation

This paper empirically investigates the effect of income and human capital inequality on economic growth in different regions of the world. In the estimation of a dynamic panel data model that controls for country-specific effects and takes into account the persistency of the inequality indicators, the results show a different effect of inequality on growth depending on the level of development of the region. Specifically, we find a negative effect of income and human capital inequality on economic growth, both in the sample as a whole and in the low and middle-income economies, an effect that vanishes or becomes positive in the higher-income countries.     

The relationship between inequality and labor market performance: Evidence from U.S. states

A central issue facing society is the equity/growth trade-off. Conventional economic theory suggests enhanced incentives associated with income inequality should increase growth, but at the expense of “fairness.” Recent theories challenge this notion by contending that inequality reduces human-capital investment and increases instability. Nevertheless, empirical evidence from U.S. states and across countries suggests an ambiguous relationship between inequality and income growth. Yet, at the state level, because inequality is related to many disamenities including crime, it can lead to lower utility and out-migration. The disamenities may produce compensating differentials that increase income. Given the inconsistencies regarding income, this study extends the literature by instead examining employment growth. Namely, long-run job growth is closely associated with net migration and any utility gains from migration. Thus, examining relative employment growth indicates whether inequality is associated with netutility gains from a vibrant economy or net-losses from disamenities. The results suggest that state-level inequality is associated with greater long-run job growth, or enhanced incentives appear to be the dominant factor.     

The effect on inequality of changing one or two incomes

We examine the effect on inequality of increasing one income, and show that for two wide classes of indices a benchmark income level or position exists, dividing upper from lower incomes, such that if a lower income is raised, inequality falls, and if an upper income is raised, inequality rises. We provide a condition on the inequality orderings implicit in two inequality indices under which the one has a lower benchmark than the other for all unequal income distributions. We go on to examine the effect on the same indices of simultaneously increasing one income and decreasing another higher up the distribution, deriving results which quantify the extent of the ‘bucket leak’ which can be tolerated without negating the beneficial inequality effect of the transfer. Our results have implications for the inequality and poverty impacts of different income growth patterns, and of redistributive programmes, leaky or not, which are briefly discussed.     

Charitable conservatism, poverty radicalism and inequality aversion

In his Presidential Address to the European Economic Association, Tony Atkinson introduced the idea of a “charitable conservatism” position in public policy, which “exhibits a degree of concern for the poor, but this is the limit of the redistributional concern and there is indifference with respect to transfers above the poverty line.” This contrasts with the perspective of poverty indices, which give zero weight to those above the poverty line, which we call “poverty radicalism,” and with standard “inequality aversion” where the weights decline smoothly as we move up the income scale. The object of this paper is, first, to clarify the interrelationships between charitable conservatism, poverty radicalism and inequality aversion. We do this by showing how the patterns of welfare weights to which each of these gives rise are related to each other. Secondly, we are concerned to demonstrate the implications of these different views for optimal income taxation. In terms of levels and patterns of marginal tax rates, we show that charitable conservatism and poverty radicalism are on a continuum, and by choice of low or high inequality aversion one can approximate either outcome fairly well.     

Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach

To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a methodology based on counterfactual tax-benefit simulations. Changes in inequality/poverty indices are decomposed into three contributions: changes in the tax-benefit structure, changes in nominal levels of market incomes and tax-benefit money parameters, and all other changes, including shifts in market income inequality and demographic composition. The policy effect can be evaluated conditionally on base-period data or end-period data; it is also possible to average the two measures, which corresponds to an application of the Shapley value method as reinterpreted by Shorrocks (Decomposition Procedures for Distributional Analysis: A Unified Framework Based on the Shapley Value, University of Essex and Institute for Fiscal Studies, Wivenhoe Park, 1999). The decomposition is used to quantify the relative role of policy changes on inequality/poverty trends in France and Ireland in the 1990s. When end-period data are not available, e.g., for forward looking analysis of possible reforms, the base weighted decomposition helps to extract an absolute measure of the impact of tax-benefit changes on income distribution as evaluated against a distributionally neutral benchmark; in our application, it is not significantly different from the policy effect stemming from the Shorrocks-Shapley decomposition. Estimates of this type are derived to assess recent policy changes in twelve European countries.     

Is the relationship between inequality and growth affected by physical and human capital accumulation?

Using the latest available data and semiparametric methods, we investigate how human and physical capital accumulation affects the relationship between income inequality and subsequent economic growth. We find that higher income inequality generally reduces economic growth over the next 5-year period. Within nations possessing little human capital, this inequality-growth penalty is exacerbated by higher levels of physical capital, thus implying that as the returns to human capital rise relative to physical capital, inequality becomes more harmful to growth. This inequality-growth pattern does not hold in well educated nations.     

A general class of inequality elasticities of poverty

Many authors have recently emphasized the crucial role of income inequalities in the design of efficient policies aimed at reducing poverty. However, the link between variations in the degree of inequality and variations in poverty is not well documented. The literature, for instance, does not provide any satisfying tool for predicting how a small relative variation in the Gini index may be associated with a variation in the headcount index. In the present paper, we define a family of Lorenz curve transformations that can directly be interpreted in terms of relative variations of known inequality measures. Then, we extend Kakwani’s (Rev Income Wealth 39(2):121–139, 1993) methodology for the calculation of inequality elasticities of poverty. Improvements are threefold with respect to Kakwani’s work. First, our formulas are not confined to the sole Gini index. Secondly, they embrace the uncertainty and the complexity of the mechanical link between inequality and poverty. Third, using some flexible functional form, one can easily perform an accurate estimation of the point inequality elasticities of poverty corresponding to observed variations of a given income distribution. We also propose a simple measure that may be helpful to assess how “pro-poor” are inequality variations by comparing the observed elasticities with the set of theoretical elasticities that could be obtained from the initial income distribution.     

Poverty and economic development: not as direct as it may seem

The relationships among various subsets of economic development, poverty, crime, and/or income inequality have been separately investigated in several theoretical and empirical studies. However, there has been very little empirical analysis on the interdependence among all these variables in one framework. This paper examines the causality between economic development and poverty while incorporating crime and inequality. It employs a co-integration test, a 4-variable vector autoregressive (VAR) model, and a Granger test in the US over the period 1959–2001. Findings reveal a feedback loop mechanism between economic development, poverty, and crime. Interestingly, income inequality as measured by the Gini coefficient has no important impact on any of the variables.     

Mass Poverty,Slow Economic Growth and Redistribution

Abstract

Policy-makers in South Africa prefer to tackle poverty indirectly through promoting growth, and allowing benefits to trickle down to the poor, rather than reducing poverty directly through redistributing income. In the long run, economic growth is the only way to reduce poverty. But the benefits of growth take a long time to mitigate poverty, especially in conditions of high inequality or high unemployment – both of which characterise South Africa. The poor benefit more through a more directly redistributive strategy even if overall growth is lower than it would otherwise be. Modelling the effects of different rates of growth, public works programmes and different redistributive strategies (including a basic income grant and expanded child support grants) shows that the poor benefit most from a directly redistributive basic income grant.     

Beyond averages: Child well-being in Kazakhstan

With the majority of poor people now living in middle-income countries and the post-millennium development goals framework taking shape, the issue of inequality has gained prominence in many policy debates. Although detailed assessments of poverty and well-being are crucial for formulating adequate policies, all too often such assessments focus on average outcomes. In this paper we present an analysis of child well-being for Kazakhstan that moves beyond averages in two ways: first, it explicitly reports on the situations of different socioeconomic groups of children in society; second, it applies a method that is diversified by age group and thereby accounts for differences among children across stages of childhood. Kazakhstan illustrates the need for more nuanced and in-depth analyses, given the significant but far from universal economic growth within the country. We find that there are large discrepancies in child well-being outcomes between different regions and that high levels of economic output do not necessarily go hand in hand with improved outcomes in terms of poverty and well-being. We argue that child well-being studies need to be more in depth, thereby ensuring that levels of inequity across socioeconomic groups and between children in different age groups are given due consideration.     

Population growth,inequality and poverty

In this discussion of population growth, inequality, and poverty, the type of relationships that can be observed in intercountry comparisons are explored, reviewing the findings of several other authors, presenting some new estimates using an International Labor Office data bank, considering some basic conceptual problems, and examining some of the theoretical and empirical issues that call for investigation at the national level. Intercountry comparisons, despite their limitations, appear to be the easiest starting point for empirical analysis. The approach adopted by most researchers has been to select 1 or more population indicators and a measure of national income inequality and to explain intercountry differences in 1 or both of these variables in terms of each other and of other indicators of economic and social development. Underlying this methodology is the assumption that there are aspects of demographic and economic change that are common to all countries included in the study, so that differences between countries give some guide to the likely evolution over time within any 1 country. This can be accepted at best with reservations, but given the scarcity of data on the evolution of inequality over time, a working hypothesis of this type appears unavoidable. But, as many of the factors likely to cause population growth and inequality operate over extended periods of time, a dynamic model is indicated. A simpler model, which pays particular attention to lags and variations over time, may generate new insights. A summary of the results of a new international cross-section analysis set up on these lines is presented. Results suggest that contrary to expectations, reducing population growth does not seem to generate longterm benefits for the poor in this model, though some short term gains are found. Increasing equality does appear to generate some decline in population growth, as well as persistent gains in incomes among the poor, but the reductions in population growth look small when set against the substantial reduction in inequality assumed. The central problem is that inequality and poverty are complex variables conceptually and empirically. 3 major sets of issues are particularly relevant: the nature of the unit of analysis; the reference period; and the conceptualization and measurement of welfare in relation to inequality and demographic change. In interpreting empirical findings, it is necessary to be aware of the different aspects of inequality and the correspondingly varied links with demographic change. The issues raised by the effects of inequality on population growth are distinct from those of population growth on the generation of inequality, and these are separated. Future research possibly will be most productive if it concentrates on the multiple roles of population growth in the transformation of systems of production.     

Theorizing the relationship between inequality and economic growth

This article explores a promising theoretical approach for reassessing the relationship between inequality and economic growth. The article draws some insights from the influential inverted U-curve hypothesis originally advanced by Simon Kuznets, but drastically recasts the original arguments by shifting two fundamental premises. First, retaining Kuznets’s emphasis on the importance of economic growth in generating demographic transitions between existing and new distributional arrays, we argue that a “constant drive toward inequality” results after replacing a Schumpeterian notion of “creative destruction” for the dualistic assumptions in Kuznets’s model. Second, while Kuznets devoted considerable attention to the impact of institutions on distributional outcomes, we argue that institutions should be understood as relational and global mechanisms of regulation, operating within countries while simultaneously shaping interactions and flows between nations. The article argues that economic growth, unfolding through institutions embedded in time and space, produces a constant drive towards inequality that results in a multiple and overlapping matrix of distributional arrays, an overall income distribution (e.g., within and between countries) that is both systemic and historical.     

Urban poverty and labor market dynamics in five Latin American countries: 2003–2008

Latin America experienced a long period of sustained growth since 2003 that positively impacted social and labor market indicators, including poverty. This paper contributes to the understanding of this process as it carries out a comparative study of poverty dynamics in five Latin American countries during 2003–2008. It analyzes the extent to which countries with different levels of poverty incidence diverge in terms of poverty exit and entry rates, identifies the relative importance of the frequency and impact of events associated to poverty transitions and examines how these events affect households with different characteristics. For this, a dynamic analysis of panel data is carried out using regular household surveys. Sizeable rates of poverty movements were observed in all five countries and it was found that a large proportion of household experienced positive events, mainly related to the labor market; however, only a small fraction of them actually exited poverty. Demographic events and public cash transfers proved to be of little relevance; in particular, the latter did not contribute much either to intensify poverty exits or to prevent poverty entries. Households with children experienced more (less) negative (positive) events than those without children. It appeared therefore that even when the economy behaved reasonably well at the aggregate level, high levels of labor turnover and income mobility (even of a negative nature) still prevail, mainly associated to the high level of precariousness and the undeveloped system of social protection that characterize the studied countries.     

Migration and Development: Mexico and Turkey

Mexico and Turkey are among the world's leading labor‐sending nations, with about 11 million Mexican‐born and 3.5 million Turkish‐born persons abroad in 2006. After two decades of uneven growth and job creation as well as persisting poverty and inequality, there are debates within both countries asking whether economic reforms have gone far enough to put the economy on a stable footing for sustained and equitable growth, or whether emigration (pressure) will continue. Some Mexicans are seeking to deepen North American Free Trade Agreement, while most Turks support entry into the European Union as a way of speeding economic growth.     

Economic Theories of Low-Wage Work

This article examines economic theories of the low-wage labor market to increase understanding of economic inequality and poverty in the United States, particularly related to the labor market. On the one hand, neoclassical, labor monopsony, and Harris-Todaro models explain how minimum wage policies are related to supply and demand of labor, human capital, employment, and unemployment. On the other hand, the efficiency wage model, the dual labor market theory, and technology development and globalization account for the causes of the wage differentials. This article includes a conceptual map that illustrates the interrelationships between these economic theories of low-wage work.     

Structural adjustment and family policy in Africa: Lessons from Sudan

The economic strategy pursued by a country profoundly influences the well-being of families. This article uses a social accounting model of the Sudanese economy to compare the effects of two alternative development strategies on growth, employment, and income distribution. The first strategy considered is a conventional growth-oriented strategy emphasizing irrigated, export-oriented agriculture and modern, capital-intensive industry; the second one is a traditional agriculture-led development (TALD) strategy focused on enhancing equity and improving family nutrition by expanding food production. The study's findings for Sudan demonstrate that there is no necessary trade-off between growth and equity. The TALD strategy fosters income growth for the most vulnerable families while simultaneously maximizing aggregate growth. It also holds the prospect of enhancing family equity and increasing access to traditional institutions that provide support to families.World BankHer research interests encompass issues related to poverty and inequality in developing countries. She received her Ph.D. from Cornell University.Before joining the World Bank, he was a visiting scholar at the University of Connecticut and acting head of the Department of Econometrics, University of Khartoum, Khartoum, Sudan. His research interests span development economics (growth, poverty, and equity), public finance, and economic transition in Eastern Europe. He received his Ph.D. from the University of Pittsburgh.     

WHY DOES CHILD LABOR PERSIST WITH DECLINING POVERTY?

We develop a dynamic overlapping generations model to highlight the role of income inequality in explaining the persistence of child labor under declining poverty. Differential investment in two forms of human capital—schooling and health—in the presence of inequality gives rise to a nonconvergent income distribution in the steady state characterized by multiple steady states of relative income with varying levels of education, health, and child labor. The child labor trap thus generated is shown to preserve itself despite rising per capita income. Policy recommendations include public provision of education targeted toward reducing schooling costs for the poor or raising the efficacy of public health infrastructure. (JEL I1, J2, O1, O2)     

Income inequality and income segregation

This article investigates how the growth in income inequality from 1970 to 2000 affected patterns of income segregation along three dimensions: the spatial segregation of poverty and affluence, race-specific patterns of income segregation, and the geographic scale of income segregation. The evidence reveals a robust relationship between income inequality and income segregation, an effect that is larger for black families than for white families. In addition, income inequality affects income segregation primarily through its effect on the large-scale spatial segregation of affluence rather than by affecting the spatial segregation of poverty or by altering small-scale patterns of income segregation.     

Growing up global and equal? Inequality trends among world children, 1980–2005

Children are increasingly expected to grow up global yet their worldwide inequality is understudied; while countries’ incomes may be converging, it is unclear whether children's outcomes also do. This paper investigates the recent trends in global inequality among children. Findings show a fall in resource inequality, driven by Asia's exponential economic growth and Africa's slowing fertility trends. Paradoxically, this resource convergence occurred alongside divergence in infant mortality. Such findings have three implications. First, they caution against assuming automatic convergence in children's well-being in response to income convergence between nations. Second, they illustrate how national differences in age dependency account for global inequality among children. Third and more broadly, they stress the importance of demographic and policy – in addition to economic – convergence in bridging substantive inequality among the world‘s children.