Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself — not just the level of income inequality — matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points — whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points… Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich… What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
—Era Dabla-Norris et al
Growth’s Secret Weapon: The Poor and the Middle Class