The Effect of Income and Wealth Inequality on Economic Growth

Sebastian Nils Olof Englund & Maximilian Sjölund

Student thesis: Master thesis

Abstract

Inequality has shown a rising trend the past decades, where the richest centesimal has captured a large part of the economic growth. The effect of income inequality on growth has been researched to a large extent, while wealth inequality has remained in the shadows because of data unavailability. With a dataset from the World Inequality Database, covering both inequality measurements, it is now possible to compare the effects of both on growth to evaluate discrepancies. A short dataset covering the years of 1970-2015 for China, France, Russia, U.K., and the U.S. compiles a total of 167 observations. An attempt to create a new instrument variable is made because of inferior instruments used earlier, but the proposed instrument turned out weak. Thus, a fixed effects model controlling for time-trends and addressing stationarity, is employed. The results when controlling for spurious regression is that neither inequality variable is significant across all regressions. When significant, wealth inequality shows a negative relationship to growth, while income inequality shows a positive coefficient, emphasising the complex relationship between inequality and economic growth. The findings show wealth to likely be a more important measure of inequality in connection to growth.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages135
SupervisorsNiels Blomgren-Hansen