In this paper, we revisit this debate using new international data and updated statistical methods. Earlier influential research suggested that redistribution could reduce inequality without harming growth. Our study re-examines this conclusion by analysing data from a large group of both advanced and developing economies between 1975 and 2019.
A key contribution of the paper is methodological. Much of the previous literature relied on statistical techniques that can perform poorly when analysing highly persistent economic data where unobserved characteristics differ between countries. We instead use a recently developed method that is better suited for this type of data, allowing us to reassess earlier findings with greater precision.
Our results show that redistribution is generally associated with lower economic growth. However, the relationship is more nuanced than a simple trade-off between equality and efficiency. We find that the negative effect mainly operates through investment. Countries with higher redistribution tend to experience lower levels of investment, which in turn slows growth. Once investment is taken into account, redistribution no longer has an effect on growth. This suggests that investment is a key channel linking redistribution and economic growth.
The study also highlights how sensitive economic conclusions can be to the choice of statistical method. Using conventional techniques, the results become unstable and depend heavily on how the data are organised. In contrast, our preferred method produces results that remain stable across different data specifications, highlighting the importance of robust econometric methods in empirical research.
Overall, the paper contributes to the broader discussion on how societies can balance economic equality with long-run prosperity. Rather than offering a simple yes-or-no answer, the results suggest that redistribution policies involve important economic trade-offs that policymakers need to consider carefully.
About the author
Marcus Nordström is a PhD Candidate in Economics at Lund University School of Economics and Management. Marcus primary research interests are in in econometrics.
This research was undertaken as part of the author’s PhD studies at the Department of Economics at Lund University School of Economics and Management. Read more about the dissertation:
