Regional Economic Growth and Income Inequality

Recently, the relationship between income inequality and economic development or growth has regained interest from economists. Theories have pointed to positive, negative and causally reverse (the inverted-U or Kuznets curve) connections between the two and empirical work on the subject has given ambiguous results. These inconclusive results have been mainly attributed to inconsistent measurement of inequality indicators due to the use of multiple sources, the neglect of changes in parts of the income distribution due to the focus on a single inequality measure and to omitted variables related to institutional differences between countries. This thesis analyzes the association between economic growth and inequality on a subnational level in Chile between 1990 and 2009, a period with high economic growth in a country with large spatial differences in growth and inequality patterns. Inequality measures are compiled from a single regionally representative household survey, thereby minimizing measurement errors and allowing for the analysis of parts of the income distribution. Results show weak signs of a U-curve relationship instead of an inverted-U between regional inequality and regional development. In addition, no clear overall relationship between income inequality measures and economic growth for Chilean regions emerges in the relevant period for both the short and long run.