Inequality, growth and welfare

Working Paper 2012-258

Abstract

We review the literature on the links between inequality, growth and welfare. Three questions are addressed: 1) What is the impact of growth and development on inequality? 2) What is the impact of inequality on growth, development and welfare? 3) What is the impact of proequality public policies upon growth and welfare? As regards the first question, the theoretical and empirical literature that analyses Kuznets hypothesis is firstly reviewed. The answer to the question of the impact of inequality on growth is twofold. Firstly, inequality fosters growth when this is based on capital accumulation, but it hinders growth when growth is based on human capital accumulation and when inequality-related social disturbances are considered. Identically, pro-equality public policies may engender very different effects upon growth depending on their influence on factor accumulation. These mixed impacts may explain the ambiguous findings provided by the empirical literature. If most of the estimates carried out in the 1990s seemed to confirm that inequality was damaging for growth, the 2000s empirical literature reconsiders this diagnosis but remains inconclusive.

Authors: Joël Hellier, Stéphane Lambrecht.