Thursday, November 29, 2012
Small inequality is good for growth, but large inequality is bad
By BEIF Team
Income inequality might take a toll on growth says an article in New York Times. The arguments presented in it, including the assertions of experts, find resonance in a research study published last year in Journal of Regional Science.
In this study, authors (Hasanov and Izraeli) found that “at the 2000 averages of inequality and income, lowering inequality or increasing it by a large amount (a change in the Gini coefficient of more than 0.1) would lower growth.” However, they also predicted “a large decline in growth due to lower inequality and a rise in growth with some increase in inequality.” Interestingly, they found in multiple analyses that “unchanged or stable inequality may be good for growth.” So, it appears that rising income inequality is clearly not good for growth. As lower economic growth means lower opportunities for business, it could be inferred that higher income inequality hampers business.
In further analysis, they unearthed a paradoxical finding. College (or higher) graduation rates increase economic growth, but also increase income inequality because they tend to raise salaries of the rich and depress those of the poor. In contrast, high school graduation rates decrease growth but also decrease income inequality; they tend to increase the incomes of poor and middle-income groups at the same time decreasing the incomes of the rich. This raises a question about whether a focus on higher education, an often suggested strategy to counter inequality, would really work to create a more equal and thus, a better society..