INCOME INEQUALITY AFFECTING ECONOMIC GROWTH – PANEL DATA ANALYSIS

Abstract

The subject paper aims to empirically assess the effect of income inequality on a country’s economic growth. GINI coefficient Index is considered as proxy for income inequality and macroeconomic variables for 32 countries, for both developed and developing, from 2010-2014, are used to examine the effect. Other macroeconomic variables used as control variables are inflation rate, unemployment rate, investment as percentage of Gross Domestic Product (GDP), gross savings as percentage of GDP whereas level of economic development is taken as dummy variable. Empirical analysis reveals that both income inequality as well as economic growth has a negative relationship but income inequality is not significant. In addition to the Gini coefficient, analysis shows that unemployment rate and gross saving to GDP are statistically significant and has a negative and positive impact on economic growth, respectively. Macroeconomic variable, inflation carries a predicted negative sign, though it is statistically not significant. Functional form of GINI coefficient, GINI squared has a small magnitude but is statistically significant affecting GDP growth rate. A contradictory relationship between investment to GDP ratio and economic growth is observed which warrants further research.