Income inequality and economic growth : An investigation of the OECD countries

Abstract: Income inequality is in a majority of earlier studies more or less affirmatively agreed to be negatively related to economic growth. The underlying complexity of the connection lacks well-tried backing in the modern time. The main purpose of this research is to identify the relationship between income inequality and economic growth, but also the effects of other factors, such as human capital and investment. This is conducted with a panel data approach on 34 OECD countries with data over the period 1990-2010. Aggregate income inequality, represented by the Gini coefficient is used in the empirical estimation, together with two other variables to control for the income inequality at the bottom and top end of the income distribution. The results indicate the aggregate inequality level to be significantly and positively related to growth, while bottom end and top end inequality is seen to have a significant and negative relationship with growth. The level of GDP per capita, education and population growth is also seen to have an impact on economic growth.