The Optimum Level of Income Inequality: Evidence from Panel Data

Syed Yusuf Saadat

This paper postulates that the relationship between income inequality and economic growth is non-linear. At low levels of income inequality, the relationship is positive, whilst at high levels of income inequality the relationship is negative. Thus, there exists a level of income inequality which maximizes economic growth. Such a level of income inequality is defined as the optimum level of income inequality. Panel data of 25 countries over a period of 50 years, from 1960 to 2010, was used to estimate an econometric model using the techniques of seemingly unrelated regression and three stage least squares. It was found that there exists a positive and statistically significant relationship between income inequality and economic growth at low levels of income inequality, and a negative and statistically significant relationship between income inequality and economic growth at high levels of income inequality. The results of this study confirm that the optimum level of income inequality occurs at a Gini value of 0.3836 on a scale of zero to one. Hence not only does income inequality matter for economic growth, but also the level of income inequality can matter for economic growth. Policies aimed at maximizing growth should consider the prevailing level of income inequality.

DOI : https://doi.org/10.21102/jbpr.2018.07.131.06