Economic growth and income inequality: asymmetric response of top income shares to growth volatility

This paper provides new evidence on the relationship between economic growth and income inequality. The data covers the period between 1870 and 2011 for 26 countries. In contrast to the Kuznets hypothesis, there is evidence of a strong U-curve relationship between the top income shares and per capita income. This finding implies that income inequality measured by a ratio of the income shares of top earners to that of the rest of population increases as economy develops. The results also suggest that top income earners benefit when the economy grows at, or above the preceding year's, 5-year Moving Average, and long-run trend growth rates, but do not significantly suffer during downturns in growth.