Agglomeration, Inequality and Economic Growth

The impact of income inequality on economic growth is dependent on several factors, including the time horizon considered, the initial level of income and its initial distribution. Yet, as growth and inequality are also uneven across space, it is also pertinent to consider the effects of the geographical agglomeration of economic activity. Moreover, it would also seem pertinent to consider not just the levels of inequality and agglomeration, but also the changes they undergo (i.e., their within-country evolution) and how these two processes interact with each other. By applying different econometric specifications and by introducing different measures of agglomeration at country level (specifically, urbanization and urban concentration rates), this study analyzes how inequality and agglomeration (both their levels and their evolution) influence economic growth in function of the country’s level of development and its initial income distribution. Our results suggest, in line with previous studies, that while high inequality levels are a limiting factor for long-run growth, increasing inequality and increasing agglomeration have the potential to enhance growth in low-income countries where income distribution remains relatively equal, but can result in congestion diseconomies in high-income countries, especially if income distribution becomes particularly unequal.