Are economic growth and income inequality intertwined?

04.11.2019

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The relationship between growth and inequality is not always clear, and is the subject of much debate among economists. Does economic growth lead to greater income inequality, or are its rewards shared by everyone? Does income inequality undermine economic growth, or is it essential to enhance development? To address these questions, the Taub Center’s 2019 Herbert M. Singer Annual International Policy Conference will focus on the relationship between economic growth and income inequality both internationally and in the Israeli context.

The inherent conflict between growth and inequality stems from the understanding that, on the one hand, incentivizing growth-enhancing activities automatically generates inequality, and, on the other hand, inequality may hamper growth if it prevents the full realization of human potential.

The economic literature claims that in order to incentivize people to do their best and be as productive as possible, there needs to be a system in place that rewards excellence and productivity. This will lead to innovation and improved efficiency and, hence, to economic growth. However, a natural result of such a rewards system is that some people get more and others less; that is, a rewards system by its very nature results in inequality.

The other side of the coin is that, while inequality might be necessary to incentivize growth, it could also be a hindrance to growth. In particular, in the presence of market failures, members of weaker social strata may have poorer access to the educational system, preventing them from gaining skills and accessing opportunities that would allow them to contribute to the economy to the best of their abilities. In other words, there may be highly capable people whose full human capital potential is never realized because of societal inequalities, thereby inhibiting economic growth.

The complex relationship between economic growth and income inequality is reflected by the ambiguous empirical findings. The literature has a hard time establishing evidence of causality or directionality between these phenomena. Additionally, there are a number of other factors that should be taken into account when examining the relationship: How should inequality be measured – using market or disposable income (before or after government intervention)? Should short-term or long-term growth be measured? Is inequality more pronounced in the lower or upper part of the income distribution?

In the Taub Center’s conference on November 14, “Growth and/or Inequality? Preparing for the Future” we will delve into these and other critical questions about the intersection of growth and inequality. Our keynote speakers, Prof. David Weil and Prof. Janet Gornick will provide an overview of the relationship between growth and inequality and insights into how to understand and measure inequality in developed countries.

The conference’s additional panels will focus on the future labor market and the education system, asking questions such as: Will the future labor market promote greater economic growth for Israel? Is there a risk that it will also lead to greater income inequality, with people of certain occupations and skill levels left behind? How can the education system promote economic growth while at the same time helping reduce income inequality? Is Israel’s education system prepared to tackle these twin challenges?

Please join us on November 14th to learn more about the interplay between these two issues that are so central to the social and economic fabric of the country, while also gaining an understanding of the risks and opportunities that lie ahead. See you there!

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