Income inequality measures and economic growth channels

This paper shows that the choice of inequality measure has a first-order impact on estimated empirical relationships. Depending on the particular inequality measure chosen, the estimated role of inequality in the transmission channels to economic growth varies and is therefore difficult to pin down with confidence. We run our analyses with six inequality measures (Gini coefficients and Top10 income shares). All six are measured consistently over time and across countries but based on distinct definitions of income—giving rise to measurement uncertainty. Differences in measurement within the set of Gini coefficients and the Top10 income shares exert a significant impact on the estimated relationships, which is generally more pronounced than the effect of switching between Gini and Top10 income shares. Finally, we show that the distinction between short- and long-run effects of inequality also becomes empirically less relevant when we allow for measurement uncertainty. We do not find a unique and stable structural relationship between inequality and the transmission channels.