New Working Paper Tests the Validity of the ‘Trickle-Down Effect’

How income is distributed throughout society and whether or not a ‘trickle-down effect’ actually benefits those at the bottom are questions explored in a new Harvard Kennedy School Working Paper.

“Do Rising Top Incomes Lift All Boats?,” co-authored by Christopher Jencks, Malcolm Wiener professor of social policy, Dan Andrews MPA 2007, and Andrew Leigh MPA 2002 PhD 2004, professor at Australian National University, uses tax data from 12 developed nations to analyze the aggregate effects of rising incomes at the top of the economic ladder.

“One central aim of this paper is to re-examine the relationship between inequality and growth,” the authors write. “We find evidence that since 1960 a rise in inequality has been associated with a modest short-term rise in the growth rate. Our second aim is to take advantage of annual data on inequality to calibrate the magnitude and persistence of these positive effects more precisely. Finally, we use these results to estimate how long it is likely to take for the positive effects of higher inequality on growth to offset the negative effects of higher inequality on the share of personal income going to those in the bottom 90 per cent of the distribution.”

The authors found that the ‘trickle-down effect’ does exist, but it often takes many years to work itself through the full economy.

“Our results support [the] conclusion that increases in inequality lead to more growth,” write the authors. “There appears to be some trickle-down effect in the long run, but since the impact of a change in inequality on economic growth is quite small, it is difficult to be sure from our estimates whether the bottom 90 per cent will really be better off or not.”

Christopher Jencks is the Malcolm Wiener professor of social policy at Harvard Kennedy School. His recent research deals with changes in family structure over the past generation, the costs and benefits of economic inequality, the extent to which economic advantages are inherited, and the effects of welfare reform. Dan Andrews earned a Master in Public Administration (MPA) at the Kennedy School in 2007. Andrew Leigh, who earned a Master in Public Administration (MPA) at the Kennedy School in 2002 and a PhD in 2004, is a professor at Australian National University. 

Read more on the Working Papers website: http://web.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=6695