Inequality and Growth: Reviewing the Economic and Social Impacts

Does rising inequality provide incentives for individuals to work harder and invest? Or does it hamper economic growth? This article reviews the now-extensive literature on the subject. It starts by outlining some of the social impacts of recent increases in inequality, concentrating on those affecting economic growth. It then notes the diverse results from econometric studies. From these results, the article focuses on the mechanisms suggested in the literature linking inequality and economic growth. It summarises results in five broad areas. While specifics vary with circumstances, in most, increases in inequality have negative impacts on economic growth.