Does redistribution hurt growth? An Empirical Assessment of the Redistribution-Growth Relationship in the European Union

Working Paper 2024-668

Abstract

This paper analyzes the relation between economic growth, inequality and redistribution. In a cross-country setting for 25 EU countries over the period between 2007 and 2019, we show that market-income inequality is related to higher growth in the short term. To estimate the impact of redistribution to low-income earners, we introduce a new measure, the so called net benefit share (NBS). Contrary to other findings, we show that this (targeted) redistribution to low-income earners (Q1 NBS) fosters growth in the short term, driven by the consumption and private investment channel. On the other hand, untargeted redistribution towards higher-income earners reduces growth.

Authors: Michael Christl, Silvia De Poli, Monika Köppl-Turyna.

Keywords: growth, redistribution, inequality, European Union
JEL: H23, O47, D63