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Inequality and Economic Growth: A Global View Based on Measures of Pay

Author

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  • James K. Galbraith
  • Hyunsub Kum

Abstract

This paper discusses two issues in the relationship between inequality and economic growth: the data and the econometrics. We first review the income inequality data set of Deininger and Squire (D&S), which, we argue, fails to provide either adequate or accurate coverage, whether through time or across countries. We then introduce our own measures of the inequality of manufacturing pay, based on UNIDO's Industrial Statistics. These provide indicators of pay inequality that are more stable, more reliable and in our view also more comparable across countries, than the D&S data. Turning to the fabled "Kuznets" relationship between inequality and economic development, we diagnose several common econometric problems in the literature, including measurement error and omitted variable bias. By taking steps to account for these problems, and by introducing a more complete panel data set based on pay inequalities, we seek more reliable inferences concerning the relationship between inequality, national income and economic growth. We find evidence that generally supports Kuznets' specification for industrializing countries: pay inequality tends to decline as per capita income increases, though with some tendency for the relationship to curve up for the richest countries. After 1981 two findings emerge. First, per capita GDP growth slowed dramatically in most countries, increasing inequality along the augmented Kuznets curve. Second, there is a global and macroeconomic effect that produces rising inequality in our data, independent of GDP or its changes. The timing of this effect suggests a link to the high real interest rates and global debt crisis of the period beginning in 1982. (JEL C23, D31, J31, O11)

Suggested Citation

  • James K. Galbraith & Hyunsub Kum, 2003. "Inequality and Economic Growth: A Global View Based on Measures of Pay," CESifo Economic Studies, CESifo, vol. 49(4), pages 527-556.
  • Handle: RePEc:oup:cesifo:v:49:y:2003:i:4:p:527-556.
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    File URL: http://hdl.handle.net/10.1093/cesifo/49.4.527
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    Citations

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    Cited by:

    1. Gimet, Céline & Lagoarde-Segot, Thomas, 2011. "A closer look at financial development and income distribution," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1698-1713, July.
    2. repec:voj:journl:v:63:y:2016:i:5:p:581-601 is not listed on IDEAS
    3. Caroline Daymon & Céline Gimet, 2007. "Les déterminants de l'inégalité et le rôle de l'équité dans les pays du Moyen-Orient et de l'Afrique du Nord," Post-Print halshs-00371042, HAL.
    4. Branko Milanovic & Lyn Squire, 2007. "Does Tariff Liberalization Increase Wage Inequality? Some Empirical Evidence," NBER Chapters,in: Globalization and Poverty, pages 143-182 National Bureau of Economic Research, Inc.
    5. Domenica Tropeano, 2006. "Fiscal policy and economic adjustment in emerging economies: what happens after the economic reforms?," Working Papers 30-2006, Macerata University, Department of Finance and Economic Sciences, revised Nov 2008.
    6. Galbraith, James K., 2007. "Global inequality and global macroeconomics," Journal of Policy Modeling, Elsevier, vol. 29(4), pages 587-607.
    7. Monica Szeles, 2013. "Re-examining the relationship between economic growth and inequality in the New Member States," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(5), pages 2799-2813, August.
    8. Kemp-Benedict, Eric, 2015. "New ways to slice the pie: Span of control and wage and salary distribution within firms," MPRA Paper 77072, University Library of Munich, Germany, revised 24 Feb 2017.
    9. Ali, Hamid E. & Lin, Eric S., 2010. "Wars, foodcost and countervailing policies: A panel data approach," Food Policy, Elsevier, vol. 35(5), pages 378-390, October.
    10. Jalil, Mohammad Muaz, 2009. "Re-examining Kuznets Hypothesis: Does Data Matter?," MPRA Paper 72557, University Library of Munich, Germany.
    11. Seyed Komail Tayebi & Sepideh Ohadi Esfahani, 2009. "Globalization and Inequality in Different Economic Blocks," Iranian Economic Review, Economics faculty of Tehran university, vol. 14(2), pages 135-151, fall.
    12. Oloufade, Djoulassi K., 2012. "Trade Openness, Conflict Risk and Income Inequality," MPRA Paper 40702, University Library of Munich, Germany, revised Feb 2013.
    13. Daymon, Caroline & Gimet, Celine, 2009. "An empirical test of the inequality trap concept," Economics Letters, Elsevier, vol. 105(2), pages 165-167, November.
    14. James K. Galbraith & Olivier Giovannoni & Ann J. Russo, 2007. "The Fed's Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality-and Presidential Politics," Economics Working Paper Archive wp_511, Levy Economics Institute.
    15. Meschi, Elena & Vivarelli, Marco, 2009. "Trade and Income Inequality in Developing Countries," World Development, Elsevier, vol. 37(2), pages 287-302, February.
    16. James Galbraith, 2009. "Inequality, unemployment and growth: New measures for old controversies," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 7(2), pages 189-206, June.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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