Income Distribution and the Demand Constraint

Abstract

This paper argues that the interaction between inequality and the demand patterns for goods is a potential source of persistent inequality. Income distribution, in the presence of non-homothetic preferences, affect the demand for goods and, due to differences in their factor intensities across sectors, it alters the return to factors of production and the initial distribution of income. Low inequality leads to high demand medium skilled intensive goods providing a bridge over which low skill dynasties may transition to the high-skilled sector in the long run. Under high inequality however, the initial lack of demand for medium skilled labor breaches this from poverty to prosperity and inequality persists.