Income inequality and growth : a cross-country comparison

Abstract

The relationship between income inequality and growth is a controversial issue which has been debated by economists these last few decades. Although various literary sources relating to the subject were examined in this dissertation, no clear-cut conclusions were ever reached on the nature of the mechanism/s through which inequality affects growth, as well as on the identification of the direction of causality. In this analysis, three cross sectional regressions were investigated from which it was discovered that inequality affects growth negatively. Such results need to be interpreted with caution given that they are not highly robust. Furthermore, limitations such as omitted variable bias and multicollinearity may have distorted the resultant outcomes. This study also emphasises the importance of the subject matter dealt with in this treatise in terms of the policy-making process; especially when this is viewed in the context of European countries where redistribution of income may exacerbate the problem of an already alarmingly high fiscal burden.