How does inequality affect long-run growth? Cross-industry, cross-country evidence

Abstract

Does inequality affect long-run growth, if so, how? To answer these questions, we examine whether industries technologically more dependent on external finance, human capital, physical capital, and contracts grow disproportionally slower in countries that had higher levels of inequality in the 1700s and 1800s. Using data for 27 manufacturing industries across 88 countries during 1981–2015, we show that industries more dependent on financial markets experienced lower long-run growth in real output, number of employees and real salaries in countries that were a priori more unequal compared to more egalitarian. There is no evidence that industries intensive in human capital experienced any differential growth in unequal countries compared to more egalitarian. However, industries intensive in physical capital had lower growth in salaries, and industries with complex contractual arrangements had lower growth in the number of firms. These findings provide important policy implications, particularly for countries with persistently high or growing inequality.