Growth, inequality and social welfare: cross-country evidence

Abstract

Concerns about rising inequality are at the forefront of many current policy debates. This paper uses a large cross-country dataset on growth and changes in inequality to assess the importance of these changes in inequality for changes in social welfare. Changes in inequality are on average small, less volatile than growth, and uncorrelated with growth. This implies that most of the variation in changes in social welfare within countries over time is due to differences in average growth performance. Equivalently, the additional growth in average incomes required to "compensate" in terms of social welfare growth – for a typical increase in inequality is quite small. The main policy implication is the importance of overall economic growth for improvements in social welfare. Our work also suggests that it is difficult to find robust correlations between policy and institutional variables and changes in inequality, indicating that there is no simple recipe for enhancing equality. Furthermore, the fact that changes in equality are uncorrelated with economic growth means that there are likely to be some equality-enhancing policies that also promote growth, while others reduce growth. With growing pressure to "do something" about inequality, policymakers should avoid undermining growth in the quest for greater equality.