How Does Income Inequality Affect Economic Growth? : Evidence From A Panel Data Analysis Of Transmission Channels In Oecd Countries

Sammanfattning

Despite substantial economic growth in many western countries, income inequality has continued to rise, making the relationship between inequality and economic growth interesting to examine. This study investigates the impact of income inequality on economic growth through several literature-established transmission channels, each represented by several proxy variables. To address the research question, a two-step fixed effects approach is employed. In the first stage, the effect of income inequality on the transmission channels is examined, while the second stage analyzes the impact of these channels on economic growth. The analysis is based on an unbalanced panel covering 38 OECD countries over the period 1990-2023, thereby providing an updated contribution to the existing literature, which has a largely relied on older datasets. The empirical findings reveal that income inequality negatively affect economic growth through several proxies. More specifically, significant negative effects are found for fertility rates and the credit market, which is in line with the study's hypotheses. In addition, weaker and less robust evidence suggests that income inequality affects economic growth through patents and political unrest as well.