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Abstract

We analyze the association between income inequality and economic growth using 72 labor market regions in Sweden during the period of 1990–2006. Compared with studies of cross-country data, the regional set-up reduces problems with omitted variable bias and endogeneity as regions within a country share the same redistributive policies and institutions. Using population register data, highly accurate measures of growth and inequality (gini, Q3, p9075, p5010) are derived. OLS cross-section and panel estimates imply that inequality between the 90 and 75th percentiles enhances regional growth and that the share of income falling to the third quintile reduces growth. These results no longer hold when we apply regions specific fixed effects and/or system GMM.