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.
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