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Symposium 2015

Virtual Library File - Trends in Income Inequality and its Impact on Economic Growth

The Challenge

The first 'EU Social Justice Index', a comparison of all 28 member states of the European Union by the Bertelsmann Stiftung, shows that the concept of social justice is realized to very different exte ...

The first 'EU Social Justice Index', a comparison of all 28 member states of the European Union by the Bertelsmann Stiftung, shows that the concept of social justice is realized to very different extents within the EU. Whereas the opportunities for every individual to engage in broad-ranging societal participation are best developed in the northern European countries, many other EU countries show massive inequalities.

Such disparities are gaining new political weight in the light of recent research by the IMF and the OECD showing that equality is actually beneficial for economic growth. Social justice, it appears, is therefore no longer a goal worth pursuing for its own sake but it constitutes the very precondition for future economic success - a paradigm shift in economic thinking. A new social model that strives for both social justice as well as growth now seems desirable and achievable.  As a result, however, the growing divide in Europe in terms of social justice would have even more serious consequences with regard to economic growth. It could firmly establish a two-tier Europe.

The income inequality in the OECD countries is at its highest level since 30 years. The econometric analysis of this OECD paper suggests that income inequality has a negative and statistically significant impact on subsequent growth. However, the rise in overall income inequality is not (only) about surging top income shares. It shows that the gap between low income households and the rest of the population is what matters most, whereas no evidence is found that those with high incomes pulling away from the rest of the population harms growth. The paper also evaluates the “human capital accumulation theory” finding evidence for human capital as a channel through which inequality may affect growth. It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth and underlines the importance to promote equality of opportunity in access to and quality of education.