On the Welfare Gains of Growth and Welfare Costs of Inequality
AbstractThis note extends Lucas' (1987) analysis to assess welfare gains of economic growth and welfare costs of consumption inequality, both within and across countries. We find that the welfare costs of inequality are significantly larger than the gains of economic growth. While the gains of economic growth are equivalent to a permanent increase of 26\% in per-capita consumption, the costs of within-country and cross-country inequality are equivalent to a permanent reduction in per-capita consumption of 45% and 90% respectively. A benevolent planner would accept a negative growth rate of 1% (instead of the baseline positive rate of 2.1%) in exchange for the elimination of all within-country inequality. The gains of economic growth are equivalent to those of reducing within-country inequality by approximately 1/3.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0507016.
Length: 22 pages
Date of creation: 15 Jul 2005
Date of revision: 17 Jul 2005
Note: Type of Document - pdf; pages: 22
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Welfare cost; business cycles; economic growth; inequality;
Find related papers by JEL classification:
- E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- D3 - Microeconomics - - Distribution
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