Asymmetric growth and the distribution of income

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A Note on Income Distribution and Growth

A Note on Income Distribution and Growth

A Note on Income Distribution and Growth William Scarth 1. Introduction The aging population has raised at least two challenges for economic policy. First, as Denton and Spencer (1998) have shown, the ongoing rate of increase in material living standards can be expected to slow if there is not an increase in productivity growth. Second, as Souare (2003) has shown, the increase in payroll tax rates that has been the Canadian solution to the fact that the aging population would have otherwise left our public pension system under funded, can be expected to raise Canada’s natural unemployment rate. This development accentuates our unequal income-distribution problem. The suggested policy response to the first challenge is usually to argue for tax cuts for those individuals who do most of the saving and investing – that is, for high- income Canadians. The standard suggestion for the income-distribution challenge is to argue for tax cuts targeted to low-income Canadians. Since all tax cuts need to be financed, these two responses appear to conflict with one another. We seem to face a trade-off between our efficiency and our equity objectives; either taxes on the rich need to be raised to finance our equity-oriented policies, or taxes on the poor need to be raised to finance our growth-oriented initiatives. The purpose of this note is to draw attention to a literature that suggests that we may not face such a trade-off after all.
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A Note on Income Distribution and Growth

A Note on Income Distribution and Growth

The aging population has raised at least two challenges for economic policy. First, as Denton and Spencer (1998) have shown, the ongoing rate of increase in material living standards can be expected to slow if there is not an increase in productivity growth. Second, as Souare (2003) has shown, the increase in payroll tax rates that has been the Canadian solution to the fact that the aging population would have otherwise left our public pension system under funded, can be expected to raise Canada’s natural unemployment rate. This development accentuates our unequal income-distribution problem. The suggested policy response to the first challenge is usually to argue for tax cuts for those individuals who do most of the saving and investing – that is, for high- income Canadians. The standard suggestion for the income-distribution challenge is to argue for tax cuts targeted to low-income Canadians. Since all tax cuts need to be financed, these two responses appear to conflict with one another. We seem to face a trade-off between our efficiency and our equity objectives; either taxes on the rich need to be raised to finance our equity-oriented policies, or taxes on the poor need to be raised to finance our growth-oriented initiatives. The purpose of this note is to draw attention to a literature that suggests that we may not face such a trade-off after all.
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Income Distribution: Effects on Growth and Development

Income Distribution: Effects on Growth and Development

Until the end of the Cold War, most development economists were not particularly concerned with the distribution of income, but instead with understanding growth and reducing absolute poverty in the developing world. For one thing, Kuznets (1955) had suggested that a deterioration in the distribution of income might be the natural outcome of the early stages of development, as people begin the shift from low-productivity subsistence agriculture to high-productivity sectors. And mainstream economists’ starting assumption, rooted in the Smithian tradeoff between efficiency and equity was that, in the other direction of causation, inequality resulting for example from increased security of property rights, would enhance growth by encouraging investment and savings and creating a necessary incentive for individuals to work hard. 1
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On Growth and Income Distribution in a Globalizing World

On Growth and Income Distribution in a Globalizing World

A BSTRACT The basic idea explaining the relationship between economic growth and income distribution is the “U- shaped hypothesis” postulated by Simon Kuznets. This can be shown in a dual-economy model with technical progress. Initially, inequality is low, but as labour participation in the modern sector increases, higher wages in this sector tend to increase inequality. However, if enough labour is incorporated in the modern sector, wage inequality begins to diminish. Income inequality continues to worsen between the two sectors, if a new modern economy (e.g. IT-based technical change) is introduced and potential GDP shifts to a new trajectory before the turning point is reached. In a globalised word, the substantial unskilled-labour-saving technical progress puts pressure on wages of unskilled workers (in industrialized countries). Also, globalization may be blamed for leaving many nations and millions of people out from reaping the benefits of globalization. This problem can only be overcome by appropriate reforms of the international economic system.
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Public Capital, Income Distribution and Growth

Public Capital, Income Distribution and Growth

However, few attempt to study their relationship analytically. Fer- reira (1995) analysed it in a model with quite a complex setup where the accessibility of higher production activity requires minimum lumpy investment and hence, if the credit market is missing, depends solely on initial wealth distribution. A steady-state distribution is derived with three social classes: lower class workers, middle-class and upper- class entrepreneurs. The provision of public investment below some level might make the "government dependable" middle-class disappear, the argument goes, creating less equality of opportunity, as well as lower growth. The present paper is the …rst attempt to analytically capture the relationship between public capital and income inequality using a simple production function such as CD, but not, of course, without a
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Growth, Income Distribution, and Poverty: A Review

Growth, Income Distribution, and Poverty: A Review

Deininger and Squire tested the link from inequality to growth, but found no stable relationship between the level of initial income inequality and growth. They found, though, that high inequality in the distribution of land, proxying for asset distribution, had a significantly negative effect on future growth. 5 The main factor identified as a possible explanation was credit rationing, in situations where investments are indivisible. It might be impossible for the poor to finance schooling or other investments, even if they would be profitable, since they lack collateral for loans. Lack of assets might also reduce possibilities for participation in the political process, and thus also reduce access to resources. Once countries become sufficiently rich, this link between high inequality and low growth seems to disappear. Low initial inequality is thus doubly beneficial for the poor, since it not only increases overall growth, but it also specifically increases their own income generating opportunities. Other policy variables, however, affect poverty mainly through their effect on investment, and investment in new assets seems more effective than redistribution of existing ones. There may be problems with the use of a land reform policy to fight poverty if it leads to reduced investments. Birdsall, Ross, Sabot (1995) found that the low inequality of income in East Asia contributed to its fast growth. In addition, policies that reduced poverty and income inequality, such as basic education and measures augmenting labour demand, also stimulated growth.
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Public capital, income distribution and growth

Public capital, income distribution and growth

However, few attempt to study their relationship analytically. Fer- reira (1995) analysed it in a model with quite a complex setup where the accessibility of higher production activity requires minimum lumpy investment and hence, if the credit market is missing, depends solely on initial wealth distribution. A steady-state distribution is derived with three social classes: lower class workers, middle-class and upper- class entrepreneurs. The provision of public investment below some level might make the "government dependable" middle-class disappear, the argument goes, creating less equality of opportunity, as well as lower growth. The present paper is the …rst attempt to analytically capture the relationship between public capital and income inequality using a simple production function such as CD, but not, of course, without a
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Growth, Income Distribution, and Poverty: A Review

Growth, Income Distribution, and Poverty: A Review

allocation, and the acquisition and application of modern technology. There is, however, strong evidence showing that it is the social infrastructure that determines the underlying levels of productivity. The evidence reviewed in this study show that countries that have been successful in terms of economic growth are also very likely to have been successful in reducing poverty. How strong a poverty-reducing effect growth has, depends on what happens to income distribution; there is no constant relationship between growth and changes in inequality. There is variation between countries with different development strategies, and one would certainly prefer strategies with more favourable distributional outcomes, if they produced the same growth. Countries that have combined rapid growth with improved income distribution, have reduced poverty the fastest. However, when policies aimed at equity have had a negative side-effect on growth, the poverty reduction impact has been limited or even negative. Thus, there may be a conflict between short-term distributional measures and immediate poverty reduction on the one hand, and long term growth-supporting measures and long-term poverty reduction, on the other. But there may also be win-win situations, where a policy for equity has a beneficial effect on growth. Typically, those policies have built up the assets of the poor, and helped increase the demand for those assets. This has meant, for example, expansion of education (building up assets), and measures that increase the relative prices of agricultural commodities and the wages of unskilled labour (increasing demand). Along with measures to secure long-term growth of the incomes of the poor, there must also be transfer schemes that help households to cope with risk, which is high for many poor groups. One should try to create schemes that can reduce risk without having high costs in terms of reduced growth.
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China’s Income Distribution System Reform and Income Growth Strategy

China’s Income Distribution System Reform and Income Growth Strategy

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/ Abstract The reform of the income distribution system is an important part of the economic system reform, is an important reflection of economic development and social progress, and is an important guarantee for building a harmonious socialist society. The income distribution gap of our country is mainly reflected in the large income gap between urban and rural areas, the large regional in- come gap, the large income gap between different industries, and the large internal income gap within enterprise, which has directly impacted on the building progress of a well-off society. We must adhere to the principle of income distribution in socialist society: “from each according to his ability, to each according to his work”, and increasing the proportion of labor-factor income in the total income year by year, until exceeding the levels of the developed capitalist countries. In addi- tion to salary, the human resources also participate in the distribution of the enterprise’s profit in the form of capital. The risk gain obtained from capital is divided into three parts among enter- prise, bank and depositor in a certain proportion. The quality level of the most basic product is proportional to the value of the minimum unit of currency. To reform the income distribution system, the country can set up 7 job positions, with each position divided into 7 levels; therefore, the income can be distributed according to the distribution coefficient table, and has an annual increment at the rate of 10%.
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Age Structure, Income Distribution and Economic Growth

Age Structure, Income Distribution and Economic Growth

C ONCLUSION This paper is concerned with the inverse relation between income inequality and economic growth. The approach used was straightforward. We began by describing four models linking inequality to slower growth. We then showed how demographic explanations complemented each of the mainstream accounts. We assumed that age structure had an ob- vious, though indirect effect on economic growth through its impact on income distribution. But in- dependent of its effect on income distribution, our review of theory suggests that age structure has a direct impact on economic performance through its effect on credit constraints, the stock of human capi- tal, and agency costs. Stylized evidence and illustrations demonstrated how national age struc- tures heavily weighted with younger working-age cohorts could induce effects as diverse as lower po- litical participation, greater social unrest, and higher borrowing costs.
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Income distribution, growth and financialization: the Italian case.

Income distribution, growth and financialization: the Italian case.

Introduction The recent performance of the Italian economy has been very weak. The main stylized facts are the slow growth of output and investment, the fall in the export share, and the worsening in the distribution of income, the fall in labour productivity. Many explanations have been proposed, though mainly on the microeconomic level. In what follows I will deal the issue whether Italy’s bad economic performance is related to financialization, having the country at the same time entered in a phase of deep structural changes involving both trade and financial liberalizations. In the first section I will give a brief review of the recent literature on financialization, from the macroeconomic side, to see whether this approach could be applied to the Italian case. In the second section I will show the main trends in macroeconomic aggregates and distribution of income in Italy and discuss the debate on these themes. In third section I will propose a very simple model of financialization, which could eventually apply to the Italian case. In that model, financialization would work through an increase in the target rate of return. The conclusions of that model, however, do not fit well the Italian case. In the last section I will examine another story, mainly dealing with monopoly power and classical competition among capitals. According to the last story financialization, interpreted as changed attitude of firms towards investment, share issue, dividends, might be a consequence rather being the origin of the problem. Conclusions will follow.
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A Positive Theory of Economic Growth and the Distribution of Income

A Positive Theory of Economic Growth and the Distribution of Income

The model answers the puzzling result emphasized by Piketty (2014). As did Karl Marx, Piketty concludes that because the return on capital repeatedly exceeds the growth rate of developed economies and does not change much over time, developed economies will face ever-increasing capital stocks. Since returns to capital go mainly to the highest income groups, the distribution of income widens over time and will continue to do so. Another possibility, of course, is that capital owners either consume or donate to charity the capital output in excess of the economic growth rate, so that capital does not accumulate faster than the economy grows. The puzzle for Piketty’s conjecture is why there is no evidence anywhere that the capital stock has approached saturation. That fact opens the way for an alternative explanation of the relative constancy of the return to capital. Unlike Piketty who bases his conclusion on a comparison of the before tax income of the top 1 or 0.1 percent to before redistribution to the lowest income groups, we compare incomes available for consumption by the di¤erent income classes. Piketty’s choice greatly overstates what has happened in developed countries. Our measure is more closely related to income after
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Income Distribution and Growth in Leontief’s Closed Model

Income Distribution and Growth in Leontief’s Closed Model

9. Conclusion This work shows an application of Leontief’s closed model that, as far as I am aware, has not been explored previously. Such application is the study of income distribution between wages and profits when the rate of profit is the same in all industries. The results are consistent with those of Sraffa’s model, except for the fact that in Leontief’s model it is possible to build a standard system for each level of income distribution. This system, except for the scale of production and the units of measure employed, is equal to any whole-industry production process taking place within the balanced-growth path corresponding to Leontief’s closed model for the given level of income distribution. Furthermore, in the balanced-growth path, for each good, the amounts of invest- ment and profit in the industry producing the good are equal to the value, respectively, of the quantity of that good consumed and the surplus of that good produced in the whole industry. For this reason, for the set of households, included in the model as a particular industrial branch, the common profit rate measures the growth of the labor force. Unlike von Neumann’s model, the balanced growth-path corresponding to Leontief’s closed model shows explicitly the quantities of labor used in each industry, the quantities of goods consumed by work- ers and the growth of the labor force. Under a weak assumption, the growth rate is independent of worker’s choice.
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Fiscal policy, growth and income distribution in the UK

Fiscal policy, growth and income distribution in the UK

An attempt is made here to develop a dynamic multi-sectoral, multi-household general equilibrium (DCGE) model with taxes and transfers and public spending, calibrated to the micro-consistent structural features of household preferences and technological features of firms from the input-output table for year 2009, and public finance accounts of the UK economy. The model results are used to study the equilibrium paths of quantities and prices resulting from the optimal choices of households, firms and the government who play important parts in both the supply and demand sides of the entire UK economy and its evolution in the 21st century. From studying the scenarios of this model, it has been possible to show how tax and transfer policies can be designed to prevent income inequality rising further while ensuring that growth rates of various sectors of the economy are complementary to each other in the steady state. Whether the growth-enhancing and inequality-reducing objectives could be achieved in the long run depends on labor-leisure and consumption-saving choices of low- as well as the high-income households, and on changes in the use of capital or labor inputs by firms in response to the public policies that often aim to achieve a higher rate of growth with greater equality of income and utility for all types of UK households. It is also clear from the model that tax reforms designed to tackle short-run problems may have very detrimental effects on long run growth and may not be helpful in reducing the inequality in the distribution of income over the long term. A sustained rate of economic growth is consistent to an optimal level of inequality. Greater equality in income alone does not guarantee greater welfare for everyone, no matter what the configuration of the social welfare function is. The bottom line is that the average levels of consumption and utility cannot grow when the economy is not growing.
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Pro-poor growth and the lognormal income distribution

Pro-poor growth and the lognormal income distribution

an absolute approach. Osmani (2005) argues for a recalibrated absolute approach, whereby economic growth is considered pro-poor if it achieves an absolute reduction in poverty greater than would occur in a benchmark case. In a sense, then, this is also a relative approach. Distributional neutrality is becoming generally adopted as the benchmark. The Osmani approach, in conjunction with a distribution-neutral benchmark, in essence requires that income growth for the poor should exceed the average growth in percentage terms, thereby reducing poverty more than across-the-board benchmark growth would. This relative requirement is clearly much stronger than the absolute one of positive income growth of the poor, which only guarantees that poverty will reduce. 1 However there is a distinction between ‘income growth for the poor which exceeds the average growth in percentage terms’ and ‘inequality-reducing growth’, as inequality theorists well appreciate. Something would be lost were the two kinds of growth to come down to the same thing in poverty analysis: we would lose the ability to conduct nuanced investigation of the pro-poorness, growth and inequality nexus.
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Income Distribution and Economic Growth: A Critical Approach

Income Distribution and Economic Growth: A Critical Approach

However, in the short-run, there is a direct correlation between profit share and the level of economic activity. During the recovery of the business cycle, unem- ployment rate is high and the productivity of total workers is low; this so because the proportion of overhead labour in total employment is high (Lavoie 1995, 2014; Blecker 2015). Therefore, at the beginning of the recovery, nominal wages do not increase, while productivity increases, reducing the share of overhead labour in total employment. So, the recovery initiates a decrease in the wage share and improve- ments in competitiveness can raise net exports, reinforcing increases in the profit share. Continuing recovery induces increases in investment and the higher invest- ment rate reinforces increases in the profit share. However, continued improvements in the economic activity modify the situation and create conditions to reverse the cy- cle and change the income distribution path. Before this, eventual increases in prices and wages reduce the economic competitiveness of the economy, worsening net ex- ports and the profit share in total income. But, it is the reversion of investment that leads to the contraction in the economic activity, leading to a symmetrical movement in the profit share compared to the expansion phase. Increases in the share of over- head labour in total employment reduce the productivity of total workers, reinforcing the effects of lower investment rate on the profit share.
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Income Distribution, Poverty Trap and Economic Growth

Income Distribution, Poverty Trap and Economic Growth

economic growth. Even when an economy does not have comparative advantage in manufacturing sector, protecting it can accelerate growth rate and raise the welfare of the economy. The logic to support the above arguments is as follows. In an equal developing country, large share of the people can receive education and the country becomes human-capital abundant. Therefore, such a country has comparative advantage in the production of human-capital intensive good such as manufactured good. As production of manufactured good exhibits externality and raises the general productivity through learning-by-doing, such equal country can experience the increase of productivity and average income. Higher income raises the educational level in the next period, which further accelerates industrialization and economic growth (virtuous circle). On the other hand, in an unequal economy, only a small number of rich people can afford education, which makes the economy unskilled labor abundant. As a result, such an economy specializes in the production of agricultural good, productivity stagnates, and growth rate becomes lower (vicious circle). Therefore, an economy becomes industrialized as it grows and protecting manufacturing sector enhances economic growth. In addition, the model also examines how income distribution changes as the economy grows and shows the possibility that distribution changes as the inverted-U hypothesis of Kuznets (1955).
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Interaction Of Income Distribution, Taxes And Economic Growth

Interaction Of Income Distribution, Taxes And Economic Growth

Barro (2000) finds that higher inequality tends to retard growth in poor countries and encourage growth in richer countries, and finds in a sense support for the Kuznet curve. The three main arguments in favor of a positive relationship between growth and inequality, reviewed in Aghion,et al (1999) : The first arguments is that if the growth rate is positively related to the proportion of national income that is saved, more unequal economies are bound to grow faster that economies whit a high level of distribution, since the marginal propensity to save of the rich is higher than that of the poor. The second is related to the issue of investment indivisibility. Investments often involve a large sunk coast, which pre- supposes that wealth needs to be concentrated for such investment projects to be undertaken- in the absence of well developed credit market. The third argument realizes on the effects of incentive through distribution. Beside the fact that a redistribution of wealth creates a more equalized distribution income, if redistribution financed by income taxes, this would also diminish the incentive to accumulate wealth.
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Economic Growth, Income Distribution, and Climate Change

Economic Growth, Income Distribution, and Climate Change

Over a period of decades, ongoing climate change lowers profitability and investment sufficiently to reduce output to sustainable levels where emissions and climate change stabilize. This process will entail overshooting of emissions and atmospheric carbon concentrations and cyclical adjustment due to the long lags in the climate system. The impacts on the distribution of income and employment levels will depend on society’s institutions. Mitigation has the potential to take off the brakes: decarbonizing energy generation avoids carbon emissions and reduces the negative impact of growth-induced climate change. In the absence of other resource limitations, the economy resumes a stable path of continued economic and labor productivity growth. In section 3 we present illustrative numerical simulations of the model, with details of the specification in the appendix.
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Bayesian Estimation for the Pareto Income Distribution under Asymmetric LINEX Loss Function

Bayesian Estimation for the Pareto Income Distribution under Asymmetric LINEX Loss Function

insensitivity to the data, we should elect to use a different family of priors. With this in mind, all the above mentioned references, except Bhattacharya, et al (1999), on the Bayesian analysis of the Pareto income distribution, used a prior density that assumes possible values over the entire region of the natural parameter space. For some functions of (α, σ), say ϕ(α, σ), there are some restrictions on the values of the unknown parameters. So, it is erroneous to assign positive prior probabilities on unnecessary regions. With this in mind, a suitable choice of prior on the restricted space is crucial.
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