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; the diminishing of opportunity; the rise in societal unrest; and its impact on political functionality. It has been well established that inequality has a negative impact on undermining educational opportunities, lowering social mobility, hampering skills development, and less-productive 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 linkage 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 through the dynamics of labor quality with the intention of incorporating economic inequality in the composition of labor quality. The results do not support the theory that economic inequality dampens economic growth. One suggestion is to use disaggregate data rather than aggregate data as some of the variation between the relationships are lost when conducting analysis in the aggregate