The Role of Income Inequality for Poverty Reduction

Jul 19, 2026

This paper links changes in absolute poverty to growth in mean incomes and to shifts in the distribution of relative incomes, and evaluates how income inequality contributes to poverty reduction. Assuming log-normal income distributions, the study shows the identity can be approximated closely. Results indicate inequality elasticity exceeds growth elasticity on average, while growth elasticity falls with a country’s initial inequality. Prior poverty changes are mostly driven by mean-income movements because inequality changes are much smaller.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages22

Reading Time55 min

AccessFree to download

Introduction

Poverty, mean income growth, and relative income distribution

Empirical strategy and data

Main findings and elasticities

Pub lic Disclosure Authorized Pub lic Disclosure Authorized The World Bank Economic Review, 36(3), 2022, 583–604 [https://doi.org10.1093/wber/lhab026](https://doi.org10.1093/wber/lhab026) Article The Role of Income Inequality for Poverty Reduction Katy Bergstrom Abstract This paper approximates the identity that links growth in mean incomes and changes in the distribution of relative incomes to reductions in absolute poverty and examines the role of income inequality for poverty reduction. Under the assumption that income is log-normally distributed, we show that we can approximate this identity well. We find that the inequality elasticity of poverty reduction is larger, on average, compared to the growth elasticity of poverty reduction and that the growth elasticity declines steeply with a country’s initial level of inequality. However, we find that prior changes in poverty were, in large part, explained by changes in mean incomes. This is a consequence of changes in income inequality being an order of magnitude smaller than changes in mean incomes. Overall, our results highlight the important role income inequality can play in reducing poverty despite prior poverty changes being, in large part, a consequence of economic growth. JEL classification: I32, O10, O15 Keywords: income inequality, growth, poverty, inequality elasticity of poverty reduction, growth elasticity of poverty reduction 1. Introduction It has long been established that an arithmetic identity exists between changes in absolute poverty, changes in mean incomes, and changes in the distribution of relative incomes (Datt and Ravallion 1992; Kakwani 1993; Bourguignon 2003) . Generally speaking, absolute poverty reductions in a country can be decomposed into growth in mean incomes, a reduction in inequality of incomes, or a combination of the two. Moreover, due to the nonlinear nature of this identity, it has been shown that the sensitivity of poverty to growth in mean incomes is dependent on a country’s initial level of inequality: in general, the (absolute) growth elasticity of poverty reduction is decreasing in a country’s initial level of income inequality.1 The literature refers to this as the double-dividend effect of reducing inequality today: a reduction in income Katy Bergstrom is an economist in the Development Research Group, World Bank, Washington, DC, USA; her email address is [kbergstrom@worldbank.org. The](kbergstrom@worldbank.org. The) author thanks Samuel Freije-Rodriguez, Daniel Mahler, Christoph Lakner, Aart Kraay, Berk Özler, Marta Schoch, Judy Yang, Michael Woolcock, and two anonymous referees for their valuable comments and suggestions. This was originally a background paper for the Poverty and Shared Prosperity 2020. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author. They do not necessarily represent the views of the World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. A supplementary online appendix is available with this article at The World Bank Economic Review website. 1 To be precise, the effect that initial inequality has on growth elasticity is theoretically ambiguous (Ravallion 2005) . However, under certain assumptions it can be shown that the (absolute) growth elasticity of poverty is unambiguously decreasing with inequality (Bourguignon 2003; Ferreira 2010) . © The Author(s) 2022 . Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: [journals.permissions@oup.com](journals.permissions@oup.com) Downloaded from [https://academic.oup.com/wber/article/36/3/583/6500933 by Sectoral Library Rm MC-C3-220 user on](https://academic.oup.com/wber/article/36/3/583/6500933 by Sectoral Library Rm MC-C3-220 user on) 10 December 2023 584 Bergstrom inequality

FAQs

How does the paper explain the relationship between income inequality and poverty reduction?

The paper connects absolute poverty changes to growth in mean incomes and changes in the distribution of relative incomes, showing how inequality affects poverty reduction through both direct and growth-elasticity channels.

Why does the paper assume income is log-normally distributed?

It uses the log-normal assumption to approximate the identity between poverty, mean income, and relative income distribution, enabling an empirical model that matches observed poverty changes well.

What do the results show about inequality versus growth in poverty reduction?

Inequality’s elasticity of poverty reduction is larger on average than growth’s, but growth elasticity declines sharply with a country’s initial level of inequality.

Jul 19, 2026

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