This paper aims to examine the impact of income inequality on economic growth and empirically assesses the validity of the alleged trade-off between redistribution and economic expansion. The analysis focuses on the EU-15 countries over the period 1980–2020.
The analysis is based on the Mankiw–Romer–Weil theoretical framework and uses the System Generalized Method of Moments estimator to address the dynamic and potential endogeneity issues. For comparison, pooled OLS and fixed-effects estimations are also reported. Furthermore, this study incorporates the Distributional National Accounts methodology of the World Inequality Database, which attributes economic growth to individuals and thereby strengthens the joint assessment of inequality and growth.
The results show that income inequality exerts a negative effect on economic growth, while redistribution positively contributes to growth performance. Further evidence indicates that this effect operates primarily through nonaccumulation channels rather than through capital accumulation mechanisms. The analysis also identifies a nonlinear, inverted U-shaped relationship between inequality and growth indicating that the persistent increase in inequality since the 1990s has constrained economic activity.
The findings underscore that policies aimed at reducing inequality can simultaneously foster economic growth. This evidence offers valuable insights for policymakers, particularly in the light of Europe’s persistently low average annual growth rates and rising inequality.
