Countries that reduce income inequality by boosting the poor’s share of wages aren’t just reducing poverty -- they’re also a providing a boon to economic growth, according to an International Monetary Fund study.
If the income share of the richest 20 percent increases by 1 percentage point, output growth is 0.08 percentage point lower in the following five years, “suggesting that the benefits do not trickle down,” IMF researchers said in a paper released Monday. Income growth in the bottom fifth boosts expansion by 0.38 percentage point over the same period.
The study adds to academic literature on income inequality, which has become a major focus in economic discussions as earnings divides widen amid the rise of technology and globalization. Leaders including U.S. President Barack Obama, Fed Chair Janet Yellen and Pope Francis have publicly discussed the swelling gap, along with its implications for economic mobility.
Widening inequality “has significant implications for growth and macroeconomic stability,” according to the five authors of the report issued by the fund’s Strategy, Policy and Review Department. “Our findings suggest that raising the income share of the poor and ensuring that there is no hollowing-out of the middle class is good for growth.”
With elevated inequality, “labor productivity could be lower than it would have been in a more equitable world” as poor children grow up in low-quality schools and forgo college, the authors wrote. “Increasing concentration of incomes could also reduce aggregate demand and undermine growth, because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups.”
In a 2014 paper, the Organization for Economic Cooperation and Development came up with similar results for OECD countries: It found that lowering inequality would translate into an increase in growth over the medium term.
The IMF paper said there are marked differences in the evolution of inequality by country, and no one-size-fits-all policy would work to tackle earning gaps. For instance, Asia and Eastern Europe have seen big increases in inequality, while Latin America has experienced “notable declines,” though the region remains one of the least equal in the world.