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Inequality and Growth in Portugal: a time series analysis

  • João Sousa Andrade

    ()

    (Faculdade de Economia/GEMF, Universidade de Coimbra)

  • Adelaide Duarte

    ()

    (Faculdade de Economia/GEMF, Universidade de Coimbra)

  • Marta Simões

    ()

    (Faculdade de Economia/GEMF, Universidade de Coimbra)

Following the recent resurgence of interest on the relationship between inequality and growth and the considerable debate that remains on its sign, we examine this nexus for Portugal during the period 1985–2007 using a time series approach. The results, using different time series methodologies, suggest that earnings inequality has a negative impact on output thus confirming the view that inequality is detrimental to growth. Moreover, according to the results from the impulse response functions based on the preferred trivariate structural VAR model, these effects last in some cases for three years after the inequality shock. As far as education is concerned, the third variable apart from output and inequality considered in our SVAR models, the evidence does not support the theoretical prediction that more inequality reduces human capital accumulation, pointing in fact in the opposite direction: an increase in earnings inequality leads to more educated workers. Thus, the evidence of a negative influence of inequality on output seems to be explained not by the fact that more inequality leads to less human capital accumulation but because it implies more redistribution, with the associated distortionary effects from taxes on investment.

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File URL: http://gemf.fe.uc.pt/workingpapers/pdf/2011/gemf_2011-11.pdf
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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2011-11.

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Length: 28 pages
Date of creation: Jun 2011
Date of revision:
Publication status: Published in Revista Portuguesa de Estudos Regionais no. 37, 2014)
Handle: RePEc:gmf:wpaper:2011-11
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  1. Miguel St. Aubyn & João Pereira, 2004. "What Level of Education Matters Most for Growth? Evidence from Portugal," Working Papers Department of Economics 2004/13, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Garcia-Penalosa, Cecilia & Aghion, Philippe & Caroli, Eve, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Economics Papers from University Paris Dauphine 123456789/10091, Paris Dauphine University.
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