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The Bilateral Effect of Income Inequality on Economic Growth

【Authors】
SHI Daqian
【WorkUnit】
The Institute of Quality Development Strategy, Wuhan University,430072。
【Abstract】

This paper studies how income inequality affects economic growth based on CGSS 2003—2013 databases. We non-parametrically decomposed the income inequality into opportunity inequality and effort inequality and used the two-tier stochastic frontier(TSFA) model to measure the influence of opportunity inequality and effort inequality on economic growth. This paper finds that opportunity inequality has a negative effect on economic growth, reducing economic growth by 5.86%;effort inequality has a positive effect on economic growth, boosting economic growth by 8.16%. On average, income inequality increases aggregate economic growth by 2.3%. This paper explains the coexistence of China's high economic growth and inequality through the decomposition of income inequality. Time trend analysis showed that the net effect of opportunity inequality and effort inequality interaction firstly increased and then weakened,showing an inverted “U” structure. As the market system improves and becomes mature,many economic entities consider the income gap caused by unequal efforts normal; the incentive effect of effort inequality has gradually weakened.

JEL:O11,E25,C14

【KeyWords】
Income Inequality,Opportunity Inequality,Effort Inequality,TSFA Model