Canadian Public Policy

Has Widening Inequality Promoted or Retarded U.S. Growth?

The United States has recently enjoyed faster economic growth than any other large industrialized country. The US also has the highest level of inequality among the G7 countries and has seen inequality increase faster than most other industrialized nations. The combination of rapid American economic growth and high and rising US inequality raises a question: Has rising inequality contributed to rapid US economic growth? This paper reviews modern theories linking inequality and economic growth and concludes that a relatively old theory suggested by Arthur Okun probably accounts for the recent combination of US growth and inequality. The country imposes fewer restrictions on economic agents and provides less help to people in distress. It makes fewer sacrifices in efficiency to achieve economic equality. Okun's theory has little difficulty explaining why these distinctive policies are associated with faster employment growth and higher average hours of work than are observed in other wealthy countries.

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