Abstract: In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.
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Provider: Federal Reserve Bank of Cleveland
Part of Series: Working Papers
Publication Date: 2017-09-06
Note: *First version posted December 2014 under the title, “The Piketty Transition”; a revised paper of the same title was posted in April 2015. This paper is an expanded version of part of the original paper.