The Debate Over the Relationship Between Income Inequality and Economic Growth: Does Inequality Matter for Growth?

Abstract

The last twenty years have seen an increasing interest by economist for understanding the effects that income distribution has on economic performance, and even though economic theory has focused traditionally in issues such as productivity and efficiency, scholars now recognize the potential causal relationship between income inequality and the way economies can grow. This paper contributes to the debate over the relationship between income inequality and inclusive economic growth by developing a comprehensive description and analysis of the most influential views that take part in this important topic. A description of the way this debate has been developing over the last decades is present, as well as a detailed review of the three main positions (negative, positive and non linear relationship) proposed in the literature. The main policy implication is that recent literature supports the statement that inequality does matter for economic growth and that inclusive distributional policies can impact growth rates in the long run.