Is it the Income Distribution or Redistribution that Affects Growth?

Abstract:

This study addresses the central question in political economy how the objectives of attaining economic growth and restricting income inequality are related. Thus far few studies explicitly distinguish between effects of income inequality as such and effects of redistributing public interventions to equalize incomes on economic growth. In fact, most studies rely on data that do not make this distinction properly and in which top-coding is applied so that enrichment at the top end of the distribution is not adequately captured. This study aims to contribute using a pooled time-series cross-section design covering 29 countries, using OECD, LIS, and World Top Income data. No robust association between inequality and growth or redistribution and growth is found. Yet there are signs for a positive association between top incomes and growth, although the coefficient is small and a causal interpretation does not seem to be warranted