Economic Freedom and the Trade-off between Inequality and Growth

Policy Reports | Economy

No. 309
Monday, March 31, 2008
by Gerald W. Scully


Economic freedom increases the rate of economic growth in a nation and improves the distribution of market income. In advanced countries, economic freedom improves equity by increasing the share of market income going to the lowest income quintile and lowering the share going to the highest income quintile. The share of income going to the middle class appears to be unaffected by the amount of economic freedom that exists.

"Economic freedom raises the incomes of the poor more than government transfers."

Economic growth raises income inequality. It does so by shifting the share of market income to the highest quintile, at the expense of the other income quintiles. But the amount of increased income inequality is rather small for substantial differences in growth rates across the sample of countries used in this study. Thus, while the trade-off between equality and economic growth is relatively modest, the trade-off between economic growth and equity is large. Nations with more egalitarian distributions of market income have lower rates of economic growth.


NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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