Relationship between income inequality and economic growth is ambiguous one but most mainstream economists view real income increase as a drag of economic growth as it leads to higher labour cost, lower competitiveness and reduction of employment. In this study we provide an alternative view and show that labour income increase may have also positive effect on growth. Which of these two effects dominates in a particular country depends on institutional and legal environment of that country, its macroeconomic conditions and also its economic policies. We test empirically two distinct economies – a small, very open economy of Slovakia and a large, closed economy of the Euro area. We find that in equilibrium, both economies are wage-led on average in the period 1993 – 2017 and hence it appears to be beneficial to pursue policies that would reduce income inequality.
National Bank of Slovakia, Imricha Karvaša 1, 813 05 Bratislava, Slovak Republic
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