“The Importance of Income Inequality at the Top End of the Distribution as Opposed to the Bottom End as Determinant of Growth”

University essay from Uppsala universitet/Statsvetenskapliga institutionen

Abstract: The aim of this study was to analyze whether income inequality is a determinant of national growth and whether this influence is different when income inequality in the upper and the lower decile of income distribution are separately examined. According to the statistical analysis that was held, income inequality was found to have some statistically significant connection with the national economic growth of selected OECD countries, but only in the long run. Moreover, the research findings indicate that when a distinction is made between top-end and bottom-end income inequality, top-end inequality has a positive effect on growth, while bottom-end inequality has a negative effect. Investment and fertility rate were not found to have a statistically significant effect on growth. The above findings were evident in all four periods that were studied. The results imply that states in OECD countries, as well as countries not belonging to this group, need to pay heavy attention to bottom-end income inequality, as a means of controlling and fostering their growth potential, while at the same time leaving top-end inequalities, which not only do not undermine growth, but also drive it. Future researchers are encouraged to conduct the same research with other countries as well, especially developing ones, while also including in the research other factors moderating the effects of income inequality in growth. 

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