Income Inequality And Its Effects On Growth

Income inequality has an effect on human capital investment and physical investment. In that case, it causes an influence on economy growth. As the Gini coefficient reaches more than 0.4, we should pay more attention on inequality. The correlation analysis shows that education year per capita and the illiteracy ratio have a strong relationship with individual's income. As income grows, the education year goes up while illiteracy ratio goes down. Meanwhile, the effects of inequality on physical capital investment may differ in two ways, the positive and negative.In this paper, we use four models to do empirical analysis on how inequality influences the economy growth. Our results show that during the period from 2001 to 2008 in China the physical capital investment plays an important role in growth while the human capital investment doesn't. In central areas being human capital indexes, education per capita and illiteracy ratio differ. Education year and illiteracy both grow as inequality of city-to-rural goes up. In a whole, to improve the low-income individuals' income and reduce the inequality will help improve the human capital investment level. In the research on inequality's effects on physical capital investment, we find inequality in central areas shows the positive effects. Also we find that improving the proportion of middle-income individuals' income in central and west areas, reducing the middle-income individuals' income will be good for physical capital investment. In the same way, from the angle of whole country physical capital investment will benefit from the inequality going down. In addition, income transferring from high-income area to low-income area will do good for the whole country's investment level.