Economic Growth and Income Inequality:

♤ Inequality affects growth drivers. Higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital.

♤ For instance, it can lead to underinvestment in education as poor children end up in lower-quality schools and are less able to go on to college. As a result, labor productivity could be lower than it would have been in a more equitable world.

♤ Increasing concentration of incomes could also reduce aggregate demand and undermine growth, because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups

♤ Inequality dampens investment and hence growth by fueling economic, financial and political instability. Extreme inequality may damage trust and social cohesion and thus is also associated with conflicts, which discourage investment.

♤ A growing body of evidence suggests that rising influence of the rich and stagnant incomes of the poor and middle class have a causal effect on crises, and thus directly hurt short- and long-term growth. In particular, studies have argued that a prolonged period of higher inequality in advanced economies was associated with the global financial crisis of 2008.