The relationship between income inequality and economic growth has long been debated in economics. Some argue that inequality encourages investment and innovation, while others suggest that excessive inequality undermines economic stability and long-term growth.
A recent analysis shows that high levels of income inequality are strongly linked to lower and less sustainable growth. This happens because inequality can:
– Reduce access to education and healthcare, limiting human capital development.
– Increase political and economic instability, discouraging investment.
– Weaken social cohesion, making economic adjustments harder during downturns.
Interestingly, redistribution policies, such as progressive taxation and social spending, do not necessarily harm economic growth. In most cases, reducing inequality through redistribution supports longer and more stable growth. However, extreme levels of redistribution could have negative effects if they create disincentives for investment and productivity.
As policymakers balance economic efficiency with social equity, finding the optimal level of redistribution remains a key challenge.
-
Ostry, J. D., Berg, A., Tsangarides, C. G., & International Monetary Fund. (2014). Redistribution, inequality, and growth. https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf