How Income Inequality Affect Economic Growth

Economic growth and income distribution are important research topics in economics.It is considered that economic growth could affect income distribution while incomedistribution will influence economic growth, so it’s necessary to search for a balancebetween each other for a seek of sustained economic growth. After30years of rapideconomic growth, China’s economy has been ranked second in the world, but it is stillinsignificant when encounters our large population. As a result, sustained high economicgrowth remains a long-term goal. At the same time, we experienced a widening incomedistribution gap. Nowadays whether income inequality will stimulate economic growth ordo some harm? What is the mechanism?In this paper, I first list the existing literature on whether income inequality is harmfulto economic growth or not and its possible mechanism systematically, in which I can’tfind a consistent conclusion. It’s generally believed that the income gap should be kept ina reasonable range in order to promote economic growth; As for the impact mechanism,they focused on the accumulation of physical capital and its investment, Which however isnot the continued momentum for growth. So I proposed a human capital mechanism incombination the current literature and theory of economic growth. As I pointed out, boththe quantities of human capital accumulation and its allocation efficiency will work.In view of this, I use urban-rural income ratio to measure income inequality andestablish a panel data model to research how income inequality affect economic growthwhich cover26provinces form1985to2011.The result showed that there exists aninverted U-shaped relationship between inequality and economic growth, and I furthercalculated the threshold level of income disparity is3.4279. At present, income gap inmost provinces have surpassed the threshold or closed to it. Overall, the current wideningincome gap is detrimental to economic growth.Then I gave some explain for the inverted U-shaped relationship from the prospectiveof human capital. This paper argues that income inequality affect economic growth fromboth the allocation efficiency of human capital and its quantity. On the one hand, it isurban-rural income inequality that dominant the whole income inequality which urgepeople to work in cities, Which greatly promote the human capital allocation efficiency soas to accelerate economic growth; On the other hand, When the income gap is so large, low-income people will probably lose the ability to invest in human capital and thehigh-income ones may be unwilling to invest because they already have enough wealth,Which is the negative influence for economic growth. I also used provincial panel data toverify this hypothesis. Further, Differences in human capital accumulation caused by theinitial income inequality will inevitably bring out income differences, the intergenerationtransfer of wealth also strengthen this situation in turn.According to the above research, I put forward two policy suggestions. First, Weshould go on to reform household registration system to protect the interests of migrantworkers so as to maximize the human capital allocation efficiency; Second, The incomedistribution system ought to be improved to form a positive interaction mechanism witheconomic growth so that it will stimulate human capital for different income groups.