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Box 5-2: Does Inequality Affect Productivity
Although conventional economic models do not include the equality
of the income distribution as a determinant of economic output,
some recent research has focused on whether increasing income inequality
might reduce the growth rate of productivity. There are at least three
channels that could produce this link and, in each, an underlying source
of income inequality potentially leads to slower productivity. The first
channel is through disparities in access to, and the quality of, publicly
funded secondary education: inequality in educational quality leads to
disparities in skills, so an increase in labor hours might not increase labor
quality, slowing labor productivity growth. For example, Goldin and
Katz (2008) argue that in the 19th and early 20th centuries, greater access
to education in the United States than in Europe resulted in the United
States having higher rates of labor productivity growth. In the United
States today, the relevant channel is not likely related to access to public
schools, but more likely geographic disparity in resources available to
students at those schools.
A second channel is that greater income inequality creates disparities
in the ability to pay for privately funded education, especially prekindergarten
and college.1 This channel too is relevant because of the
increasing expense of post-secondary education.
A third channel, discussed by Acemoglu and Robinson (2011), is
that sufficiently powerful and entrenched elites have an incentive to use
resources to protect their interest rather than encourage growth. The
relevance of Acemoglu and Robinson’s examples of extractive societies
drawn from world history—ancient Rome, the Mayans, slave-dependent
economies in the early Americas, and so forth—to the United States
today is less clear than that of the other channels.
There have been some attempts to use cross-country differences as
sources of variation for econometric studies of the link from inequality
to productivity growth. Those attempts, however, confront a variety
of data availability and measurement issues, including comparable
measures of inequality (Fields 2001) and insufficient variables to avoid
spurious effects being loaded onto the inequality measure (Banerjee and
Duflo 2003). In any event, the question of whether the increases in U.S.
inequality over the past two decades have dampened, or could dampen,
productivity growth remains an important source of concern.
1 Except for programs like Head Start, pre-kindergarten education is privately financed.
Heckman, Pinto and Savelyev (2012) contribute and list literature demonstrating the
importance of early childhood intervention to subsequent schooling and other life
outcomes. At the college level, nearly all students pay at least some of their educational
expenses.
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