Growth and Inequality: Dependence on the Time Path of Productivity Increases (and Other Structural Changes)

Manoj Atolia

Florida State University

Santanu Chatterjee

University of Georgia

Stephen J. Turnovsky

University of Washington

January 2009

ABSTRACT

This paper examines the significance of the time path of a given productivity increase on growth and inequality. We show that whereas the time path impacts only the transitional path of aggregate quantities and has no effect on their ultimate steady-state levels, it has both transitional and permanent consequences for wealth and income distribution. As a result, the growth-inequality tradeoff generated by a given discrete increase in productivity contrasts sharply with that obtained when the same ultimate productivity increase is acquired gradually. This is true both in transition and across steady states. We show that a gradual productivity change can generate a Kuznets-type inverted U-shaped relationship between inequality and per-capita income. The distance from the technology frontier is also shown to have important implications for both the magnitude and persistence of inequality. Finally, our results suggest that economies with similar aggregate structural characteristics may have very different outcomes for income and wealth inequality, depending on the intrinsic nature of the productivity growth path.

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