Income inequality in the OECD area: On measuring its possible effects on economic growth

Abstract

This thesis studies possible effects income inequality might have on economic growth and examines whether it is reasonable to measure these effects in detail with the tools provided by growth econometrics. Recently published research indicates a strong negative effect of net income inequality on growth and this thesis assesses whether these findings can be considered reliable and significant. This objective is accomplished by inspecting recent literature concerning the subject with a detailed emphasis on a particular OECD working paper stating a robust negative effect of net income inequality on growth. Said working paper, Cingano (2014), is constructed on the MRW augmented Solow model, which is introduced and assessed. Moreover, the estimation model and method as well as the data sets used in Cingano (2014) are examined in detail. Furthermore, development of income inequality in the OECD area in recent decades and theoretical channels through which income inequality might affect growth are introduced and discussed. This thesis finds that overly specific conclusions about the strength of the estimated effects should not be made based on growth regressions on the subject. This conclusion is reached because the estimates often lack sufficient data and there are problems concerning the estimation models and methods. This thesis finds considerable difficulties concerning Cingano (2014) that are also linked to other literature addressing the effects of income inequality on growth in general. Based on the findings in this thesis, it seems unreasonable to interpret the findings of the literature in such a detailed manner as they are expressed. However, this thesis does not suggest that the subject and research about it lacks importance, but suggests that the focus ought to be directed to micro-level data and channels where genuine progress could be accomplished.