Income inequality and minimum consumption: implications for growth

Abstract

We propose a model that recognizes hierarchical goods and income inequality among households. The model demonstrates that growth is impacted not by inequality per se, but "absolute" income distribution or the level of poverty underlying the income distribution. Specifically, when a large fraction of the population is below the threshold income necessary for subsistence, aggregate consumption is depressed. In low-income countries, high inequality of income retards consumption growth, whereas in high-income countries inequality may be neutral for growth. Cross-country regressions indicate a positive and significant relationship between the middle quintile share of income and aggregate consumption. In all cases analyzed, increasing income in the middle quintile increases consumption growthIncome distribution ; Consumption (Economics)