: 4. Does inequality damage growth?

How inequality impacts on economic development is disputed among researchers. Studies carried out at the time of the financial crisis frequently found no clear connection. However, very recently academics have more often supported the position that increasing income inequality has a negative influence (for an overview cf. Behringer et al. 2016).

The upshot of recent research work carried out by the International Monetary Fund (IMF; for an overview cf. Dabla-Norris et al. 2015) and the Organisation for Economic Cooperation and Development (OECD; for an overview cf. OECD 2015) is that in recent decades countries with greater income inequality have evinced less economic growth and shorter growth phases than countries with less income inequality (Ostry et al. 2014; Cingano 2014). It is precisely when inequality grows, as has been the case in Germany and many other industrial nations since the 1990s, that researchers observe negative effects. According to the OECD, economic growth in countries like the USA, Great Britain and Germany would have been roughly one fifth more between 1990 and 2010 had income inequality remained constant. In Germany, real gross domestic product per capita rose in this period by about 26 percentage points – almost six percentage points less than would have been the case with unaltered inequality. The main explanation given in the study for the losses in economic growth is that in times of rising inequality lower income groups can invest less in education, thus weakening social mobility and the development of “human capital”.

In a very recent study, the German Institute for Economic Research (DIW) (cf. Albig et al. 2017) likewise comes to the conclusion that the rise in inequality in Germany between 1991 and 2015 probably impaired economic development. Accordingly, real gross domestic product in 2015 would have been approx. 40 billion euros more had the Gini coefficient of disposable household incomes, the common indicator for the extent of inequality, remained constant since the reunification. Cumulatively this equates to a growth rate about two percentage points higher. Although compared to the OECD study the influence of increasing inequality on economic development is less, the DIW researchers’ long-term forecast for Germany is that the development of growth will be weaker because of the impact of increasing inequality on the qualification level of employees.

It is true that caution is required when evaluating these results, as low economic growth in individual countries has likewise contributed to the increase in inequality – the causality is the reverse in this case. However, it seems probable at present that increasing inequality results in weaker macroeconomic growth. Hence many economists see in the rise of inequality a structural cause of the financial crisis (for an overview cf. van Treeck 2014). As a consequence many countries slid into severe recession, which would explain why the results of the more recent studies allow the conclusion that increasing inequality is associated with a decline in growth.

References

Albig, Hanne et al.: Wie steigende Einkommensungleichheit das Wirtschaftswachstum in Deutschland beeinflusst, DIW Wochenbericht Nr. 10, März 2017

Behringer, Jan, Theobald, Thomas, van Treeck, Till : Ungleichheit und makroökonomische Instabilität: Eine Bestandsaufnahme, WISO Diskurs, FES, 2016 

Cingano, Federico : Trends in Income Inequality and its Impact on Economic Growth, OECD Social, Employment and Migration Papers No. 163, 2014 

Dabla-Norris, Era et al.: Causes and Consequences of Income Inequality: A Global Perspective, IMF Staff Discussion Note, Juni 2015

OECD: In It Together – Why Less Inequality Benefits All, Mai 2015 

Ostry, Jonathan D.,  Berg, Andrew,  Tsangarides, Charalambos G.: Redistribution, In­equality, and Growth, IMF Staff Discussion Note, Februar 2014