The effects of economic and population growth on national saving and inequality

Abstract

This is a progress report on ongoing research into the effects of economic and population growth on national saving rates and inequality. The theoretical basis for the investigation is the life cycle model of saving and inequality. We report evidence that is conditional on the validity of the model, as well as evidence that casts doubt on it. Using time series of cross-sectional household surveys from Taiwan, Thailand, Britain, and the United States, we show that it is possible to force a life cycle interpretation on the data on consumption, income, and saving, but that the evidence is not consistent with large rate-of-growth effects, whereby economic and population growth enhances rates of national saving. The well-established cross-country link between economic growth and saving cannot be attributed to life cycle saving, nor will changes in economic or population growth exert large effects on saving within individual countries. There is evidence in favor of the life cycle model’s prediction that within-cohort inequality of consumption and of total income—though not necessarily inequality of earnings-—should increase with the age of the cohort. Decreases in the population growth rate redistribute population toward older, more unequal, cohorts, and can increase national inequality. We provide calculations on the magnitude of these effects.