Income Distribution and Growth: What effect does the shape of the income distribution have on economic growth in Sweden?

Abstract: Economic inequality and its effect on growth is a topic that has been researched extensively. However, the empirical findings, so far, have not come to an agreement of the overall effect. This thesis studies this relationship, using panel data on Swedish counties for the time period 1991-2006 and it investigates the reliability of earlier studies made on Swedish data. Moreover, this thesis adds to previous studies by considering how inequality, in different parts of the income distribution, affects economic growth.Using fixed effect regressions, this thesis finds that the overall effect of inequality on growth is positive in the short run, which supports previous research made on Swedish data. Furthermore, the results indicate that this effect is driven by a positive effect of inequality on growth in the lower part of the income distribution. In contrast, inequality in the upper part of the distribution has a negative effect on growth. These findings imply that inequality in different parts of the income distribution have various effects on growth in Sweden.