Inequality of Outcomes, Inequality of Opportunity, and Economic Growth

Working Paper 2020-534

Abstract

Is the relationship between inequality of opportunity (IOp) and economic growth different from the relationship between inequality of outcomes and economic growth? I answer this question using System GMM regressions applied to data for 27 European countries covering the period 2005-2011. I find that a one-standard deviation increase in IOp results in a statistically significant decrease in growth rates, ranging from 0.65 to 1.03 percentage points. On the other hand, inequality of outcomes has no statistically significant effect. The estimates are robust to the choice of instrumental variables and estimation approach. Additional analysis reveals that human capital levels partly explain this relationship, and that the effect is stronger for inequality indexes that are sensitive to changes in the middle of the distribution, with bottom-sensitive indexes having almost no effect.

Authors: Rafael Carranza.