Equality and efficiency: The illusory tradeoff

Abstract. Scholars and policy makers have traditionally assumed that nations face a tradeoff between income equality and economic efficiency. Greater equality is believed to reduce investment and dampen work incentives. A heterodox view suggests that a more egalitarian distribution of income may have beneficial efficiency effects by augmenting consumer demand and/or encouraging workers to cooperate in upgrading competitiveness. This paper offers an empirical assessment of the relationship between equality and efficiency, based on cross-sectional data from 17 advanced industrialized economies over the period 1974–90. The comparative evidence indicates no adverse impact of greater equality on investment or work effort, nor on growth of productivity or output, trade balances, inflation, or unemployment. On the contrary, higher levels of equality are associated with stronger productivity growth and trade performance, and possibly with higher investment and lower inflation.