Income inequality, the wage share, and economic growth

Abstract

It has long been argued that an increase in inequality increases the rate of economic growth by increasing the share of income going to profit recipients, whose saving contributes to capital accumulation, so that growth is profit-led. A more recent tradition argues that an increase in equality and a rise in the wage share can increase growth by increasing consumption and investment demand, so that growth is wage-led. Bhaduri and Marglin and others argue, however, that even if economic activity is demand-determined, a shift in income distribution towards profits can increase output and growth. This paper examines how a reduction in inequality affects economic growth, thereby contributing to the debate on wage-led and profit-led growth and broadening it to focus on inequality rather than the profit share. It does so by reviewing and re-examining the cases in which workers save, the determinants of investment, and the open economy, three issues that have been emphasized in the literature.