Inequality and Growth: The Neglected Time Dimension

When it comes to the inequality-growth relationship, the empirical literature offers contradictory assessments: Estimators based on time-series variation only (i.e., differencesbased estimators) indicate a strong positive link while estimators also exploiting the crosssectional variation (i.e., level-based estimators) suggest a negative relationship. Taking advantage of a new dataset, the present paper confirms this conflicting pattern — but also offers an explanation on the basis of a simple model: The seemingly inconsistent empirical results just mirror different aspects of reality. More specifically, we argue that the differences-based methods are prone to reflect the (mostly) positive shortor medium-run implications of inequality while the level-based estimators also incorporate the negative consequences — which require more time to materialize. Thus, the latter estimates come close to reflect the adverse overall impact of inequality in the long run. JEL classification: O11; O15; O43; C23