The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?

Abstract

This study aims to determine whether the effect of income inequality on economic growth is realised through transmission channels theoretically expressed. This relationship is examined for 143 countries and the periods between 1980 and 2017 through positive and negative channels. These countries are divided into two groups by considering their income levels and they are analysed with panel data econometric techniques. Although the findings provide evidence that high inequality adversely affects economic growth, it can be stated that this inference cannot be generalized when countries' income levels are taken into account. Countries with higher inequality tend to have higher fertility rates and less innovative activity. The financial market imperfections in developing countries adversely affect human capital investments. On the other hand, high inequality tends to increase saving propensity in developed countries and provides evidence for the positive channel. The findings highlight the complexity of the impact of income inequality on economic growth. Therefore, indirect impact needs to be scrutinized and policy recommendations need to be carefully designed.