As part of an event celebrating the National Employment Law Project, I participated in a panel moderated by Bob Herbert, former oped writer for the NYT (an extremely compelling one at that, whose themes were race, poverty, inequality, and justice) and now a senior fellow at Demos (the other panelists were Dorian Warren and Lynn Rhinehart).
The question of the impact of inequality on growth came up and that made me want to work out my thoughts on that relationship. These issues are very usefully addressed in this recent paper by Boushey and Hersh (more on that below; see their page 8 for a short summary of the ineq/growth lit), but here, in an extended post, are some of my thoughts about it.
The classic theory on how growth affects inequality maintains that there’s an inverted U-shaped relationship over long periods of economic development. As emerging economies grow they initially become less equal as the few with high financial endowments profit off of their ownership of key productive resources, like land. Then, as industrialization evolves, much more of the population has the chance to participate in higher value-added work which reduces inequality.
[Here’s a very interesting read from yesterday’s NYT on a close cousin to this argument, focusing on growth and personal happiness in China—and a useful reminder, if you needed one, of the importance of job security and safety nets.]
Note that in this argument, as in my own on this topic, causality goes from growth to inequality, i.e., the latter is the dependent variable. I’ve stressed the important and inequality-reducing impact that full employment—itself a function of growth—has on the earnings and incomes of middle and low-income households.