What drives the cross‐country growth and inequality correlation?

Abstract

We present a neo-classical model that explores the determinants of growthinequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of the growth-inequality relationship. The initial distribution of human capital determines the long-run income distribution and the growth rate by influencing the occupational choice of the agents. The steady-state proportion of adults that innovates and updates human capital is path dependent. The output elasticity of skilled-labour, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady-state equilibria. From a calibration experiment we report that a skill-intensive technology, low barriers to knowledge spillovers, and high degrees of redistribution characterize the industrial countries with a positive growth-inequality correlation. A negative correlation between growth and inequality arises for the group of non-industrial countries with the opposite characteristics. JEL classification: E1, O4Qu'est-ce qui sous-tend la corre´lation transversale entre la croissance des pays et son niveau d'ine´galite´? On pre´sente un mode`le ne´o-classique qui explore les de´terminants de la corre´lation croissance-ine´galite´et on tente de re´concilier les re´sultats qui semblent contradictoires a`ce propos. La distribution initiale de capital humain de´termine la distribution des revenus a`long terme et le taux de croissance en influant sur le choix occupationnel des agents.En re´gime permanent, la proportion des adultes qui innovent et ame´liorent le capital humain de´pend du sentier d'origine. L'e´lasticite´de la production par rapport au travail qualifie´, les barrie`res aux effets de de´bordement de la connaissance, et le degre´de redistribution de´termi-nent le corridor des e´quilibres en re´gime permanent. A partir d'une expe´rience de calibration, il appert qu'une technologie a`forte intensite´de compe´tences, des barrie`res faibles aux effets de de´bordement de la connaissance, et beaucoup de redistribution sont des e´le´ments qui caracte´risent les pays ou`la corre´lation croissance-ine´galite´est positive. Une corre´lation ne´gative e´merge dans le groupe de pays non industrialise´s qui a les caracte´ristiques inverses.

An adjustment cost model of social mobility

“…If adults undertake no investment in their child's education, for instance, unlike Benabou (2000), the child still inherits some workable human capital in proportion to (1 )h it . Viewed from this perspective, one may think of 1 as the degree of intergenerational spillover of knowledge as in Mankiw et al (1992) and Bandyopadhyay and Basu (2005).…”

“…The residual inequality is then mostly attributed to luck. Since then a considerable body of literature (e.g., Loury, 1981, Banerjee and Newman, 1993, Galore and Zeira, 1993, Benabou, 1996, Mulligan, 1997, Bandyopadhyay and Basu, 2005, Bandyopadhyay and Tang, 2011 has evolved emphasizing the role of credit market imperfection in perpetuating the inequality.…”

Inequality-growth nexus along the development process

“…On the other hand, when human capital accumulation is the driving force of growth, inequality lowers growth by exacerbating the effect of credit constraints on human capital accumulation. Conversely, Bandyopadhyay and Basu (2005) predict that owing to differences in technology and policy parameters, a positive correlation should arise for the group of industrial countries, whereas a negative correlation should arise for the group of non-industrial countries. Given that growth engine, technology parameters, and policy parameters may change as the economy advances along the development process, inequality could impede growth in one income regime while accelerate growth in another, rendering the use of a linear specification questionable.…”

“…Galor and Tsiddon (1997), Galor (2000), and Galor and Moav (2004) posit that the prime engine of growth is a critical determinant of whether inequality is harmful or beneficial for growth. Bandyopadhyay and Basu (2005) propose a general equilibrium growth model in which the inequality-growth correlation depends on the nature of technology and the extent of redistribution. They show that a positive inequality-growth correlation arises in economies with low barriers to knowledge spillover, high skill intensity in the technology, and high degree of redistribution.…”

“…Conversely, economies with the opposite characteristics should display a negative inequality-growth relationship. Importantly, the model in Bandyopadhyay and Basu (2005) implies that if the nature of technology and redistributive policy are allowed to change, there could be a sign reversal in the inequality-growth correlation.…”