An econometric study of the inverted U-shaped, multiple-turning-point curve of the relationship between economic growth and income inequality

XU Bing and ZHANG Shangfeng

Institute of Quantitative Economics, Zhejiang Gongshang University
Abstract:

The inverted U-shaped curve depicted under the traditional econometric model has no or only one turning point, making it difficult to examine the existence of multiple turning points in the inverted U-shaped curve of the relationship between economic growth and income inequality in China during the economic transition period. This paper represents an attempt to measure the inverted U-shaped multiple-turning-point curve of the relationship between economic growth and income inequality using the nonparametric local polynomial estimation technique. This study found there are three turning points in China’s income inequality curve: a “roller coaster” ride from a steep concave rise to a gentle convex rise and then from a gentle convex to a steep concave rise and from a steep concave rise to a gentle convex rise. At present, the income inequality curve remains in the left side of the inverted U moving up at a much slower pace. The empirical study based on inter-provincial panel data further found that China’s inverted U-shaped curve will have two turning points and that income inequality tends to stabilize and fall after reaching each of the two turning points. During the 11th Five-Year plan period (2006-2010), average annual GDP growth rate will be 7.5%; after 2010, log GDP per capita will be greater than 9.73 and income inequality will stabilize; after 2015, log GDP per capita will be greater than 10.11 and income inequality will shrink.

Keywords:

Income inequality, inverted U-shaped hypothesis, local polynomial estimation, turning point

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