Income Inequality and Growth: Problems with the Orthodox Approach

The empirical evidence suggests the latter is generally the case and, as a consequence, there is not likely to be a trade-off between greater income equality and efficiency (the latter being reflected in a lower economic growth rate). This is reinforced by considering the mainstream explanation of the distribution of income and by a consideration of the argument as to whether labor is paid its marginal product, which is found to be problematic. Hence, some reservations about the use of the aggregate production function are raised. The paper turns next to the question of whether or not a greater degree of inequality causes a slower economic growth, both for the advanced and the developing countries. It next considers if the increasing gap between the top one percent and the rest of the income distribution has been either responsible for, or exacerbated, the Great Recession. It concludes that the degree of inequality is an important factor in determining economic activity and one that has been ignored for too long in macroeconomics