Inequality and Economic Growth in the UK
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Inequality and Economic Growth in the UK Xiaoliang Yang1
· Patrick Minford2,3 · David Meenagh2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper analyses the effect of wealth inequality on UK economic growth in recent decades with a heterogeneous-agent growth model where agents can enhance individual productivity growth by undertaking entrepreneurship. The model assumes wealthy people are more able to afford the costs of entrepreneurship. Wealth concentration therefore stimulates entrepreneurship among the rich and so aggregate growth, whose fruits in turn are largely captured by the rich. This process creates a mechanism by which inequality and growth are correlated. The model is estimated and tested by Indirect Inference and is not rejected. Policy-makers face a trade-off between redistribution and growth. Keywords Inequality · Growth · Heterogeneous-agent · Entrepreneurship · Indirect Inference JEL Classification E10 · O30 · O40
1 Introduction This paper investigates the relationship between capital inequality and aggregate economic growth in the UK during recent decades. This was a period when UK growth was greatly strengthened by a variety of supply-side reforms, while at the same time inequality rose substantially and commentators on the political left (e.g. Hutton 1995) widely blamed the reforms for a ‘culture of greed’ and for the rise in inequality.
Xiaoliang Yang
[email protected] 1
Zhongnan University of Economics and Law, Wuhan, China
2
Cardiff University, Cardiff, UK
3
CEPR, London, UK
X. Yang et al.
Fig. 1 Facts of the postwar economy in the UK
Minford and Meenagh (2020) explored a DSGE model linking growth to these supply-side reforms, testing it by Indirect Inference on the facts of the episode—set out in Fig. 1. The facts of inequality also show substantial movement during this period: see Fig. 2 for the shares of the top 10% of the population in income, wealth and consumption. For example, the income share of the top 10% rose from 1980 to the mid-1990s before levelling off, while their wealth share rose to a peak at the end of the 1990s before falling back almost to its starting point. Their consumption share fluctuated around a slightly rising trend. In this paper we build on Minford and Meenagh (2019) and ask whether there was indeed also some relationship between growth and inequality at work in this episode. We supplement their model with a heterogeneous agent set-up in which random shocks have distributional effects and higher wealth increases the incentive to
Fig. 2 Inequality indicators
Inequality and Economic Growth in the UK
innovate as an entrepreneur, the idea being that the costs of entrepreneurial entry are more easily absorbed. We test this model too by Indirect Inference against the same facts but now including inequality. To anticipate our main results, we find that this model of growth and inequality is not rejected as a match to the facts of data behaviour. The model implies that there are trade-offs between growth an
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