Income Inequality, the Welfare State, and Economic Growth Across Time and Space

Sociologists, economists, and political scientists have studied the association between economic growth and income inequality, although with different foci. Some scholars have primarily studied the economic implications of inequality, while others have studied the distributive effects of economic growth. In both literatures, the welfare state is implicated as a key mechanism although with different functions. Some researchers posit that high inequality generates public support for social welfare which ultimately slows economic growth. At the same time, researchers contend that stronger economies with faster growth have greater capacity to reduce inequality via the redistributive effects of the welfare state. Yet, to date, no research has simultaneously tested these theoretical propositions.  This paper examines the relationship between income inequality and economic growth through non-recursive structural equation modeling by examining a cross-national, longitudinal dataset. We find partial support for both research traditions.