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A Reassessment Of The Relationship Between Inequality And Growth: What Human Capital Inequality Data Say?

  • Amparo Castelló-Climent

    ()

    (Universidad Carlos III de Madrid)

This paper studies the empirical relationship between inequality and economic growth. It estimates a dynamic panel data model that controls for fixed effects and, therefore, solves the problem of omitted variable bias present in cross-section regressions. Forbes?(2000) results suggest that income inequality and economic growth are positively related when country specific effects are taken into account. This paper shows that this result holds even controlling for education inequality. However, neither the first difference nor the system GMM estimator, which seems to perform better in growth regressions, support a positive association between education inequality and economic growth. On the contrary, an increase in human capital inequality is related to lower subsequent growth rates not only in the long-term across-countries but also in the short-term within a country. In particular, the negative relationship between human capital inequality and growth is mainly due to a discouraging effect on the physical capital investment rates and, in line with the model of De la Croix and Doepke (2003), through a channel that connects inequality an fertility decisions.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2004-15.

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Length: 33 pages
Date of creation: Jul 2004
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasec:2004-15
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  1. William R. Hauk & Romain Wacziarg, 2004. "A Monte Carlo Study of Growth Regressions," NBER Technical Working Papers 0296, National Bureau of Economic Research, Inc.
  2. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers 575, China Economics and Management Academy, Central University of Finance and Economics.
  4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  5. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  6. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
  7. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92 National Bureau of Economic Research, Inc.
  8. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
  9. Panizza, Ugo, 2002. "Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
  10. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  11. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  12. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  13. Amparo Castello & Rafael Domenech, 2002. "Human Capital Inequality and Economic Growth: Some New Evidence," Economic Journal, Royal Economic Society, vol. 112(478), pages C187-C200, March.
  14. Saint-Paul, Gilles & Verdier, Thierry, 1992. "Education, Democracy and Growth," CEPR Discussion Papers 613, C.E.P.R. Discussion Papers.
  15. Bertola, Giuseppe, 1991. "Factor Shares and Savings In Endogenous Growth," CEPR Discussion Papers 576, C.E.P.R. Discussion Papers.
  16. Thomas Piketty, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 173-189.
  17. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
  18. David de la Croix & Matthias Doepke, 2001. "Inequality and Growth: Why Differential Fertility Matters," UCLA Economics Working Papers 803, UCLA Department of Economics.
  19. Galor, Oded & Tsiddon, Daniel, 1997. "The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, vol. 2(1), pages 93-124, March.
  20. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
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  24. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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  26. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
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  28. repec:dau:papers:123456789/10091 is not listed on IDEAS
  29. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September.
  30. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1127-1170.
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  33. Perotti, Roberto, 1996. "Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  34. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 151-172.
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