Inequality and economic growth: the empirical relationship reconsidered in the light of comparable data

Discusses the relationship between inequality and economic growth, and the problems of data analysis. Many studies have found evidence of a negative correlation between these two variables. However, these studies have used data that have not been measured in a consistent manner.

This paper argues that it is a mistake to treat as comparable inequality data based on gross income, net income, expenditure, and also individuals and households. But this is precisely what past researchers have been forced to do due to a lack of comparable data. Pre-existing empirical work needs to be interpreted with caution., as such work is sensitive to whether the distribution data are measured consistently or not.

On data analysis the paper point out that:

• Even when consistently measured data on gross income are included in a cross-country growth regression, there is no evidence of a significant correlation between inequality and economic growth.
• When consistently measured expenditure data are used, there is evidence of a significant negative correlation between inequality and growth.
• There is only a significant correlation between inequality and growth, once redistribution of income is taken into account.
• the estimates obtained in cross-country empirical work on economic growth are highly sensitive to thesample of countries included. It is therefore important in such work to report how sensitive the results are to the omission of influential observations and/or outliers.

This paper confirms that there is a negative correlation between inequality and growth across countries, but only when the focus is on inequality after redistribution has taken place. No evidence is found of a significant correlation between gross income and economic growth [author]