Whether if welfare is affected by inequality or growth is one of the “hot” topics in economics. It is stated from economic theory that Welfare can be affected in two potential ways by these situations. A positive effect over Welfare from economic growth, and a negative effect of Welfare by increases in inequality.
Some new evidence points out that heterogeneous effects are derived from both of these situations in regards the behavioral response of Welfare across continental regions. (A working paper titled “On the Welfare Trends: A view from Sen’s Social Welfare Function” depicts this complex relationship). The next graph taken from the Working Paper made in M&S Research Hub provides an example of this behavior.
We can witness that a general pattern arises when Gini Coefficient increases significantly (in particular more than 40), where a reduction in the Sen’s Welfare Index is occurring. This is not a general behavior in what regards the slopes of the relationship. It is a steeper slope for Sub-Saharan Africa in comparison to Latin America and the Caribbean.
Preliminary results evidence that not all the continents are affected with statistically significant results of the inequality towards Welfare, and Latin America tends to be a special case in the relationship.
Published results excluding Venezuela from the article of Riveros-Gavilanes (2020) point out that for this part of the American continent, the magnitude over the long run of the inequality represents much larger effects than economic growth. However, important discrepancies may exists in what relates to short-run dynamics. As appointed for this case of study. the short-run behavior only provides evidence that economic growth tends to alter the growth of Welfare in comparison to the long-run behavior where improvements in inequality tend to increase Welfare. In particular, the empirical strategy involved using the Human Development Index as the measure of Welfare across the Latin-American countries, and the income per capita was measured by the real GDP per capita and the complement of the Gini coefficient. This complement is used as the basis for “higher equality” when the regressions are estimated.
The relationship between Welfare and inequality, along with economic growth is a topic that requires further research, (see the working paper in the repository (https://ms-researchhub.com/home/research/msrworkingpapers.html) which will provide a better overview of the regional heterogeneous effects.
Seeking equality is a common objective of States and governments, but in recent times, the task has been more complex as more evasion and flexibility of the rules may occur. Inequality then here comes with the cost of Welfare for the highest amount of the population as the effect is given by the proportions of the income distribution. The highest amount of individuals affected, the larger the harm to Welfare.
In fact, micro-data research could be particularly important from both theoretical and empirical aspects in what relates to the harm to Welfare, if somehow, we are able to present a “sufficient statistic” of Welfare. Or at least, a form to measure individual welfare. In the mean time, the theoretical discussion provides great foundations for what may occur in the future as income inequality rises in the world. In particular, after the Covid-19 Pandemic and the Russian-Ukranian conflict.
References
Riveros-Gavilanes (2020) Estimación de la función de bienestar social de Amartya Sen para America Latina, Ensayos de Economia. 31(59), 13-40. https://revistas.unal.edu.co/index.php/ede/article/view/88235/82113
