Changes or levels? Reassessment of the relationship between top-end inequality and growth

This study explores the association between top-end inequality and subsequent economic growth. The motivation stems from the results of Banerjee and Duflo (2003), who study nonlinearities in the inequality–growth relationship and find that changes in the Gini coefficient, in any direction, are associated with lower future growth. The current study addresses the issue of nonlinearity and exploits the top 1% income share series in 25 countries from the 1920s to the 2000s in various specifications. First, this study finds that the association between the level of top 1% share and growth is more evident in the data than the link between the change in top 1% share and growth. Second, the main results on the top 1% shares relate primarily to currently “advanced” economies; a negative association is discovered between the level of top-end inequality and growth, but this relationship is likely to become weaker in the course of economic development. Third, this study illustrates that the sample composition deserves attention in inequality–growth studies