An Empirical Analysis of Economic Inequality on Economic Growth

For the United States, one of the most important trends of concern is the growing level of inequality. It is widely accepted that the United States is currently experiencing historically high levels of economic inequality. There are numerous reasons for policymakers and citizens to be concerned about the rising level of inequality, such as its impact on the basic American social contract that says that hard work pays off and the diminishing of opportunity. It has been well established that inequality negatively impacts educational opportunities, social mobility, skills development, and labor inputs. Most research has studied the extent to which higher inequality is associated with less opportunity and mobility. This research studies if there is a causal link between higher inequality and slower macroeconomic growth. The main hypothesis is that inequality limits human capital accumulation primarily through the channel of educational attainment, which then dampens labor quality. Reductions in labor quality led to slower economic growth. This research attempts to measure this relationship by incorporating income inequality in the composition of labor quality. The results do not support the hypothesis that as the United States has seen a rise in inequality, economic growth decreases. One suggestion is to use disaggregate data rather than aggregate data as some of the variations are lost when analyzing aggregate data