Genetic Distance, Economic Growth and Top Income Shares: Evidence from OECD Countries

The relationship between economic growth and income inequality remains a puzzle in the literature. The main problem has been finding a way to account for the endogeneity of growth. Using century-long data of 14 OECD countries, this study disentangles the growth–inequality relationship. In doing so, our main contribution is employing genetic and geographical distances as instruments for economic growth. The instruments are constructed on the premise that the growth of one country spills over to the others if they are connected through trade and other forms of exchange; however, the genetic and geographical distances between countries represent barriers to such spill overs. Using alternative specifications and measures, we find that growth reduces the inequality measured by top income shares. Another important finding is that the effect of growth on top income shares is more significant among the highest income groups. We also find that growth, by reducing inequality, neutralises the inequality-enhancing nature of capital, hence confirming the prediction of Thomas Piketty regarding the pervasive nature of capital.