DP8033 Inequality and Growth: The Neglected Time Dimension

Author(s): David Halter, Manuel Oechslin
Publication Date: September 2010
Keyword(s): Growth, Inequality, Long-run Effects, Medium-run Effects
JEL(s): C23, O11, O15, O43
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8033

The empirical literature on the relationship between inequality and growth offers a contradictory assessment: Estimators based on time-series (differences-based) variation indicate a strong positive link while estimators (also) exploiting the cross-sectional (levelbased) variation suggest a negative relationship. Using an expanded dataset, the present paper confirms this conflicting pattern — and reconciles it on the basis of a simple model. We argue that the differences-based methods are prone to reflect the mostly positive shortor medium-run implications of inequality while the level-based estimators also incorporate more negative long-term consequences. Thus, the latter estimates come close to reflecting the adverse overall impact of inequality in the long run.