Search

This paper attempts to clarify what trade-offs might exist between equity and growth. It is found that (i) there is not enough evidence to state definitively that inequality is either good or bad for growth, although the results cannot be taken so confidently as to rule out completely any effect; and (ii) increased social protection expenditure is bad for growth; although (iii) active social spending programs, which are designed to encourage increased employment activity by the beneficiaries, are good for growth while passive programs are bad for growth. However, since voters want both equity and growth the policy conclusion is not to cut social expenditures to boost growth but rather to shift the focus from passive to active programs. This is also supported by a different interpretation of the results, that cutting transfers encourages entry into the labour market, both increasing growth and narrowing the income distribution. [ABSTRACT FROM AUTHOR]

A recent body of empirical cross-country research has confirmed that income inequality is negatively related to economic growth. This paper provides an explanatory channel for this observed relationship. The novelty of our approach consists in the use of demographic channels to account for cross-country differentials in economic growth and income distribution. We present four models that have emerged as the most plausible transmission mechanisms linking inequality to slower growth. In each instance we demonstrate how a consideration of demographic age structure can complement the four mainstream accounts. [ABSTRACT FROM AUTHOR]