THE EFFECT OF ECONOMIC GROWTH ON INCOME INEQUALITY:PANEL DATA ANALYSIS FROM FIFTY COUNTRIES

Abstract

The relationship between economic growth and income inequality is one of the controversial issues in macroeconomics. Many studies have been done to show the relationship between economic growth and income inequality. However, the research about this problem by using panel data is still minimum. Also, there is still no research that differentiates the effect between lower-middle, upper-middle, and high-income countries. This paper examines the effect of economic growth on income inequality by analysing a panel data set of fifty countries from 2000 to 2018. Using the Pooled OLS, Fixed Effect, and Random Effect Model, this paper finds that economic growth has a positive significant impact on income inequality, which means the higher the economic growth, the bigger the gap between the rich and the poor. The empirical evidence suggests that a one-point increase in GDP growth will increase the Gini Index by 0.082 to 0.085 points on average. Moreover, the paper finds that the effect of economic growth on increasing the incidence of income inequality seems to be higher in lower-middle and upper-middle income countries than in high-income countries.