Is inequality good for growth?

Whether inequality affects growth is an interesting question for at least two reasons. First, today inequality is a hot topic, and many claim it is bad for our economy. Is there any truth to these claims? Should we actively try to reduce inequality?

Second, if wealth distribution matters for growth, then differences in development among countries can potentially be (partially) explained by their initial, historical wealth distributions. For instance, if inequality is good for growth, then it could be that countries with high inequality at the dawn of the Industrial Revolution (i.e. when growth kicked off) have done better than those with low inequality.

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Minimum wage won’t cover rent in Europe either

So there is an article circulating online (citing a study by the National Low-Income Housing Coalition) stating that a full-time worker earning minimum wage can’t afford to rent a one-bedroom apartment anywhere in the US. The article seems to hint at the fact that this is the result of too low minimum wages (and too high inequality) in the US.

But is the situation any different in countries with lower inequality and more generous welfare states? What do the figures in Europe look like? In this post, I perform the same analysis for Europe.

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What if robots take our jobs?

Robots are becoming more sophisticated and common, and consequently they will inevitably displace a large number of workers (they have already done so). But historically, while technological progress generally resulted in painful transitory periods, in the long run it was always for the better. The question is whether this will remain the case.

Recently, even middle class jobs were replaced by machines because of the IT revolution. This might exacerbate inequality as the upper classes and those who can adapt to the new technologies will be able to reap the benefits of higher productivity (thanks to machines), but others will lose their jobs or will be forced to lower paying positions. Until now, for the most part new jobs have been created for the displaced workers in various industries. But what if this ceases to continue? What if labor gets replaced by robots and no new labor-intensive jobs arise?

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Should natural resources be publicly owned?

Natural resources are a special kind of property, because in a sense they belong to the public. But their extraction is also possible by private corporations. There are in fact pros and cons to both. Private ownership has been shown to be more efficient and more profitable. But public ownership may be better at benefiting the region or country the resources are located in.

Of course, efficiency and profitability are important, but a country’s goal should be to maximize the welfare of its citizens. So what happens if we take a look at the effects of resource ownership on economic growth? Is private ownership still preferable to public ownership?

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Why are richer people more successful?

It is a fact that kids from more advantageous backgrounds have better life outcomes: kids whose parents are richer and/or educated are themselves more likely to be rich and educated. Why is this the case?

Of course, there is a lack of social mobility involved: rich kids have better opportunities. But today, in most developed countries, poor kids have the very same opportunities in theory. This is because education all the way through high school (and in many countries even beyond that) is free or heavily subsidized. What is it then that makes kids from a more advantageous background more successful? On what dimensions do these kids differ from disadvantaged ones? And does socioeconomic status matter once we account for these differences?

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Can inequality affect growth?

Both theoretical and empirical research have found conflicting evidence as to what the relationship between economic growth and inequality is. There is some evidence for monotonic, linear positive or negative relationships. And then there is the much more plausible-sounding nonlinear, hump-shaped relationship.

My understanding is that more recent (empirical) evidence supports the nonlinear view. But there are still open questions such as what kind of shape the relationship takes exactly, or where exactly the turning point is.

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Elite universities and social mobility

Social mobility has decreased over the past two decades. Overall, there was some divergence between countries: the US, the UK and France for instance experienced a decrease in social mobility, while the trends were rather flat in e.g. the Nordic countries.

One dimension along which these countries differ is their tertiary education system: the US, the UK and France have two-tier systems with standard and elite universities. In this post I’m asking what effect such a stratification of college education can have on social mobility.

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