We apply a stochastic dynamic general equilibrium model that jointly determines income inequality and the growth rate of income per capita in order to identify how a change in the distribution of human capital generates a specific type of growth-inequality relationship by examining data on the New Zealand economy, which experienced discrete and significant changes in human capital distribution, income inequality and growth rate of per capita income in the past two decades. In particular, we focus on the contrasting implications of two popularly used policies for manipulating income inequality and economic growth in New Zealand: immigration and redistribution. Our simulations of the model's equilibrium outcome reveal two facts. First, an immigration shock that exogenously decreases the underlying distribution of skilled and unskilled labor implies a negative growth-inequality relationship subsequently, supporting the well-known regression result of Persson and Tabelini (1994). Second, a change in the redistributive income taxes, which may bring about subsequent changes in human capital distribution but only endogenously, implies a positive relationship, supporting the other well-known regression result by Forbes (2000). In the absence of any shocks, if the initial distribution of human capital differs from the steady state distribution then the transitional dynamics also generate a positive relationship supporting Kaldor's hypothesis that a higher income inequality may be a necessary price to pay for a faster economic growth, although in the short run. To sum up based on the simulations of the benchmark model for the New Zealand economy, we find that understanding the nature of a change in the human capital distribution provides the key to our prediction for the observed growth-inequality relationship. If the change occurs exogenously, then the relationship would be negative. Otherwise, if it arises endogenously, then it is likely to be positive.
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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number
2008_21.
Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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