Measuring Income Inequality and Implications for Economic Transmission Channels

IMF Working Papers, August 14, 2020

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Study focus: channels that theoretically transmit the effects of inequality to economic growth, in contrast to literature focusing on the direct linkage.
Main conclusion: the role of inequality in transmission channels is difficult to pin down and varies with the particular inequality indicator chosen.
Approach: analyses run with six methodologically distinct inequality measures (Gini coefficients and Top10 income shares).
Methodological finding: methodological differences within the set of Gini coefficients and the Top10 income shares exert a first-order impact on the estimated relationships, which is generally larger than the effect of switching between Gini and Top10 income shares.
Net effect on growth: for a given inequality indicator, transmission channels can react in opposite directions, with the net effect on growth difficult to determine.

Inequality measures used: six methodologically distinct measures, comprised of Gini coefficients and Top10 income shares.
Analytical emphasis: comparison across inequality indicators to assess sensitivity of estimated relationships to methodological choices.

Indicator sensitivity:
- Methodological differences within Gini coefficients and within Top10 income shares have a first-order impact on estimated relationships.
- This intra-measure methodological variation is generally larger than the difference between using a Gini coefficient versus a Top10 income share.
Channel heterogeneity:
- Transmission channels can respond in opposite directions for the same inequality indicator.
- Consequently, the sign and magnitude of the net effect on growth are often indeterminate from these channels alone.

Time variation: estimated relationships change over time.
Fragile countries: inclusion of fragile countries creates significant but counterintuitive empirical associations that may obscure structural relationships.

Subject: Disposable income, Human capital, Income distribution, Income inequality, Labor, National accounts, Personal income
Keywords: and political stability, capital consumption, Disposable income, economic growth, event study, fragile countries, Global, growth transmission channels, Human capital, Income distribution, income inequality, Income inequality, income share, inequality indicator, inequality measurement, Personal income, price level, series amount, share indicator, share series, WP