Factoring inequality into economic growth

The National Bureau of Economic Research released a working paper by Harvard University economist Nathaniel Hendren on August 4 that provides a new way of looking at the relationship between inequality and growth. His paper develops a new statistic, the inequality deflator, which allows researchers to adjust the value of an economic variable, such as average household income, for different levels of inequality. Because averages don’t tell us anything about distribution, the deflator lets us compare those averages by adjusting for the different distributions.

The accompanying graphic shows how much household income increased in the United States after adjusting for rising income inequality between 1979 and 2012. With more attention being paid to the relationship between inequality and growth, Hendren’s inequality deflator can become a powerful tool for understanding the linkages between the two.