Is an unequal equilibrium inevitable?: an exploration of income inequality, economic growth, and financial development

Abstract

This paper examines whether financial development and economic growth impact income inequality using the 1970 through 2005 Estimated Household Income Inequality index from the University of Texas Inequality Project. Panel cointegration analyses indicate that inequality, growth, and financial development move together in the long-run. I find no evidence of a Granger-causal relationship between financial development and income inequality, yet economic growth predicts and increases income inequality. Unobserved effects model estimates offer some empirical evidence for Kuznets (1955) hypothesis.