Income inequality and economic growth : an econometric analysis of OECD countries (2005-2018)

Abstract

This paper aims to explore the effect of inequality and how income inequality affects economic growth. Policymakers need to understand how income inequality affects Gross Domestic Product (GDP) and to determine if there are other effects, since this may affect the sustainability of a country. We used secondary data provided from reports of the central banks of the Organisation for Economic Co-operation and Development (OECD) member countries and then subjected them to trend analysis and 4 other analysis methods, specifically; fixed effect regression method, random effect, Hausman- Taylor estimation and Arellano-Bond estimation. Based on these empirical results we can conclude that income inequality, poverty rate and unemployment have significant effects on the economic growth of a country. In fact, during the period analysed, we see a negative correlation between Income inequality and GDP for OECD countries. In addition, we found that the most sensitive period was that of the global economic crisis of 2008-2009. However, when interpreting these results, we need to understand that there are also different approaches and meanings to poverty and the points of view of individuals and their perceptions can have an important role.