The short-run relationship between inequality and growth: evidence from OECD regions during the Great Recession

ABSTRACT

This paper provides evidence on the relationship between income inequality and economic growth in Organisation for Economic Co-operation and Development (OECD) regions during the decade 2003–13. It combines household survey data and macroeconomic databases, covering over 200 comparable regions in 15 OECD countries. The econometric results, based on two alternative sets of instruments, highlight a general negative association between inequalities and economic growth since the start of the economic crisis. This relationship is sensitive to the type of urban structure. Higher inequalities seem to be more detrimental for growth in regions characterized by medium to large-sized cities, while regions characterized by small cities and rural areas are less affected.

KEYWORDS:

• inequality
• economic growth
• urban size
• OECD regions

JEL:

• O15
• R11
• R12

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

ORCID

Vicente Royuela http://orcid.org/0000-0002-7647-0063

Paolo Veneri http://orcid.org/0000-0002-4640-5500

Raul Ramos http://orcid.org/0000-0003-0047-0793

Notes

1. Table A1 in Appendix A in the supplemental data online summarizes the main theoretical arguments that have been put forward to uncover such a complex relationship and distinguishes mechanisms operating in the long run from those having a role in a short-time horizon as well as growth-enhancing factors from growth-hindering factors.

2. Territorial level (TL) 2 regions are the higher level of OECD regions, which correspond in most cases to the principal subnational unit of government (states or provinces). There are 214 regions in the selected countries. Owing to lack of data on individual income, inequality statistics of five of these regions are not considered: three for Canada (Yukon, Northwest Territories and Nunavut), one for Finland (Åland), and one for Korea (Jeju).

3. Figure A1 in Appendix A in the supplemental data online displays the relative distribution of urban population by country.

4. The Hansen test with a reasonable number of instruments was robustly rejected for different geographical areas due to lags of the internal instruments, methods differences (between GMM and orthogonal GMM-SYS), endogenous/predetermined consideration of the other control variables and inclusion of external instruments.

5. Results are robust to the use of other indicators of income inequality and are available from the authors upon request.

6. As the instruments used in the growth equation are generated regressors, standard errors on the slope coefficients are usually incorrect for hypothesis testing. However, as noted by Brückner (2013), in the special case of testing that slope coefficients are equal to zero, these standard errors are correct.

7. We also considered additional regressions by splitting the subsample of regions with smaller cities above and below 200,000 inhabitants. The obtained results remained unchanged, but we agree with one referee that it is an interesting aspect to be considered as further research.

8. In fact, it is also reasonable to argue that the results might be affected by alternative definitions of the dependent variable. We also developed our estimates considering two-year growth rates and exponentially smoothed data for both one- and two-year growth rates. The main conclusions of our work hold. The results can be obtained from the authors upon request.

9. We also tried with subsamples to divide the period with observations until 2007 and 2008. The results are robust for such alternative specifications.

 

Additional information

Funding

This work was supported by the Secretaría de Estado de Investigación, Desarrollo e Innovación [grant number ECO2016-75805-R].