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Mathematics & Economics
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The Effects of Economic Growth on Income Inequality in the US (Article Sample)


Article on economic issue

SUBJECT: (The effects of economic growth on income inequality in the US)
CITE: (Rubin, A., & Segal, D. (2015). The effects of economic growth on income inequality in the US (Journal of Macroeconomics)
Living standard of nations living in current era is much higher as compare to the nations of 17th or 18th centuries. This is because of the process of growth which enables us to consume more as compared to our precedents. But it is a common consideration that growth raises income inequality among individuals. Such that low income families don’t reap from growth as like rich families reap.
In this regard this study examines this relation by incorporating current growth and future expected growth. Contrary to previous studies that have only analyzed the impact of current growth on inequality, this study has incorporated the effect of future changes in growth with the help of changes in stock market which are capable of predicting changes in future growth. As the income of high income groups include wealth earnings and their labor earnings which consists of equity compensation this study examine both sources of income. The study examines two hypotheses. First, whether a small variability in growth causes to change the wealth more as compare to stock variable which are non-convertible into cash. Second, because pay for performance includes major component of high income groups, the study analyzes that the labor income for high income groups is more responding to volatility in growth as compare to labor income of low income groups.
In order to analyze these hypotheses study uses the data from data base of Piketty and Saez (2003, 2006). The study covers the period of 1953-2008 for United States. The study employs univariate as well as multivariate analyses. In multivariate, this uses GMM generalization to LIML. The results show that the income of top 1 percent responds double to changes in growth as compare to changes in income of lower 90 percent. Further this study shows that the income of top 1 and 5 percent groups positively responds to the fluctuations in future growth changes. While the income of lower 90 percent group negatively responds to changes in future expectations of GDP. When analyzed to changes in market return the income of top groups is found to be more responding as compare to low income groups. These findings show that there is a positive relation between current GDP and future GDP growth and income inequality.
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