INEQUALITY AND GROWTH IN THE UNITED STATES: WHY PHYSICAL AND HUMAN CAPITAL MATTER

We investigate the relationship between economic growth and top income inequality under the influence of human and physical capital accumulation, using an annual panel of U.S. state‐level data. Our analysis is based upon the “unified” framework offered by Galor and Moav (2004) while the empirics account for cross‐section dependence, parameter heterogeneity, and endogeneity, in nonstationary series. We conclude that changes in inequality do not influence growth, neither in the short run nor in the long run in the United States as a whole in the 1929–2013 period. Our findings are robust to the inclusion of overall income inequality measures. These findings provide support for the theoretical prediction of the unified theory of inequality and growth, according to which the growth effect of inequality becomes insignificant in the latest stages of economic development that the United States experiences during our period of investigation. Therefore, future policies aiming at moderating the concentration at the upper end of income distribution are not likely to have adverse growth consequences in developed countries such as the United States. (JEL I21, O47, C23)     

The relationship between inequality and labor market performance: Evidence from U.S. states

A central issue facing society is the equity/growth trade-off. Conventional economic theory suggests enhanced incentives associated with income inequality should increase growth, but at the expense of “fairness.” Recent theories challenge this notion by contending that inequality reduces human-capital investment and increases instability. Nevertheless, empirical evidence from U.S. states and across countries suggests an ambiguous relationship between inequality and income growth. Yet, at the state level, because inequality is related to many disamenities including crime, it can lead to lower utility and out-migration. The disamenities may produce compensating differentials that increase income. Given the inconsistencies regarding income, this study extends the literature by instead examining employment growth. Namely, long-run job growth is closely associated with net migration and any utility gains from migration. Thus, examining relative employment growth indicates whether inequality is associated with netutility gains from a vibrant economy or net-losses from disamenities. The results suggest that state-level inequality is associated with greater long-run job growth, or enhanced incentives appear to be the dominant factor.     

NOT ALL BANKS ARE EQUAL: COOPERATIVE BANKING AND INCOME INEQUALITY

This paper studies the role of different types of credit institutions in income inequality. By analyzing Italian local (provincial) credit markets over the 2001–2011 period, we find that cooperative banks mitigate income inequality in local communities more than their commercial counterparts. The results also suggest that it is the specific nature and orientation of cooperative banks, more than their relationship lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears however to be partly channeled by a reduced dynamism of local economies, especially lower migratory flows and business turnover. (JEL G21, G38, O15)     

Inequality and growth: evidence from panel cointegration

This paper uses heterogeneous panel cointegration techniques to estimate the long-run effect of income inequality on per-capita income for 46 countries over the period 1970–1995. We find that inequality has a negative long-run effect on income, both for the sample as a whole and for important sub-groups within the sample (developed countries, developing countries, democracies, and non-democracies). The effect is economically important, with a magnitude about half as high as the magnitude of an increase in the investment share.     

ACCOUNTING FOR URBAN CHINA'S RISING INCOME INEQUALITY: THE ROLES OF LABOR MARKET,HUMAN CAPITAL,AND MARRIAGE MARKET FACTORS

This paper analyzes China's rising family income inequality since the early 1990s when the urban labor market started its transformation from a centrally controlled to a market‐driven one. We document the trends in income inequality over the period of 1992–2009 using the Urban Household Survey data, and adopt the approach recently proposed by Eika et al. (2014) to decompose changes in income inequality. We find that labor market factors accounted for about three‐quarters of the overall increases in income inequality while falling marriage rate contributed the other quarter. Changes in human capital levels and marital assortativeness have not contributed to the rising inequality. (JEL D31, I26, J12)     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

Does income inequality contribute to credit cycles?

Recent literature presented arguments linking income inequality to the financial crash of 2007–2008. One proposed channel is expected to work through bank credit. I analyze the relationship between income inequality and bank credit in a panel cointegration framework and find that they have a long-run dependency relationship. Results show that income inequality contributed to the increase of bank credit in developed economies after the Second World War.     

PITFALLS IN TESTING FOR COINTEGRATION BETWEEN INEQUALITY AND THE REAL INCOME

Frank (2009) constructed a comprehensive panel of state‐level income inequality measures using individual tax filing data from the Internal Revenue Service. Employing an array of cointegration exercises for the data, he reported a positive long‐run relationship between income inequality and the real income per capita in the United States. This article questions the validity of his findings. First, we suggest a misspecification problem in his approach regarding the order of integration in the inequality index, which shows evidence of nonstationarity only for the post‐1980 data. Second, we demonstrate that his findings are not reliable because the panel cointegration test he used requires cross‐section independence, which is inappropriate for the U.S. state‐level data. Employing panel tests that allow cross‐section dependence, we find no evidence of cointegration between inequality and the real income. (JEL D31, O40)     

THE DECOMPOSITION OF INEQUALITY BY CLASS AND BY OCCUPATION:

Sociological research on earnings and income has focused on predicting individual income. Analyses most often use occupational status or class, along with other economically relevant variables, to explain earnings or income variations among individuals (income determination). Aggregate inequality (income distribution) has received considerably less attention, except in cross-national research. This especially holds for applying central concepts of stratification to the analysis of inequality. That is, class and occupation differences in economic rewards are rarely used to investigate aggregate earnings or income inequality. This study, using 1976 and 1977 Panel Study of Income Dynamics survey data, estimates the proportion of total earnings/income inequality accounted for by class and by occupation. Theil's index is used to measure earnings and income inequality and thus decompose total inequality into between-and within-group components. Wright's five-category schema is replicated for decomposition of inequality by class and a traditional four-category ordinal typology for decomposition by occupation. The two schemas show similar results: both class and occupation respectively account for between one-fifth and one-fourth of total earnings and income inequality. The results show the relevance of these central stratification typologies for the analysis of aggregate inequality.     

THE EFFECTS OF EXPORTS, PUBLIC DEBT, AND DEVELOPMENT ON INCOME INEQUALITY

Classical economics and most modernization theorists hold that a curvilinear relationship exist between income inequality and development level. In this article that relationship is tested. In addition, it is hypothesized that exports and debt as percentages of gross domestic product increases individual income inequality. Regression analyses with controls for development and time were used to test these relationships (N=28 at two time periods). To test these hypotheses with additional data a panel cross-section design was used with data for countries where it is not available a two separate times (N=37 and N=46). The results do not provide evidence to support a curvilinear relationship between development and income distribution when controls for dependency are included in the regression equation. The results from all six regressions presented support the hypothesis that exports enhance income inequality. Moreover, a covariant analysis indicates that exports effect inequality significantly more in undeveloped countries than in developed countries. It is concluded that for less developed countries pursuing export-oriented production, income does not become more evenly distributed at later stages of development.     

INEQUALITY AND TRUST: NEW EVIDENCE FROM PANEL DATA

We estimate the causal link from income inequality to generalized trust by reconsidering the country‐level evidence on this issue. First, we exploit the panel dimension of the data, thus controlling for any country unobservable time‐invariant variables, and find a negative relationship between the two variables that holds only for developed countries. Second, we focus on these advanced economies and provide instrumental variable estimates using the predicted exposure to technological change as an exogenous driver of inequality. According to our findings, the negative causal effect of inequality on trust is even larger than that coming from ordinary least squares estimation. We also provide new insights on the effects of different dimensions of inequality, exploiting measures of both static inequality—such as the Gini index and top income shares—and dynamic inequality—proxied by intergenerational income mobility. (JEL D31, O15, Z13)     

ECONOMIC RESTRUCTURING,THE EDUCATIONAL INCOME GAP,AND OVERALL INCOME INEQUALITY

An important consequence of the economic structure transformations of recent decades is increased income inequality. While an extensive literature has explored the relationship between economic restructuring and inequality, the unique contribution of this article is that it develops and tests a model that explores the mechanisms by which this process occurs. Specifically, the intervening role of the income gap between the well-educated and those with lower levels of education (the educational income gap) and other moderating factors are explored. The 5 percent Public Use Microdata Sample (PUMS) data from the 2000 Census of Population and Housing was used in the analysis. The data provided strong support for the model. It was found that economic structure and the moderating variables were strongly related to the educational income gap, which in turn was strongly related to overall income inequality. Generally, both the educational income gap and overall income inequality were greater in geographic areas with higher proportions of the labor force employed in services, and both were lower where greater proportions of the labor force were employed in goods-producing industries.     

TAX POLICY AND INCOME INEQUALITY IN THE UNITED STATES, 1979–2007

This paper assesses the effects of U.S. tax policy reforms on inequality over around three decades, from 1979 to 2007. It applies a new method for decomposing changes in government redistribution into (1) a direct policy effect resulting from policy changes and (2) the effects of changing market incomes. Over the period as a whole, the tax policy changes increased income inequality by pushing up the income share of high‐income earners (the top 20%). (JEL H23, H31, H53, P16)     

Is the relationship between inequality and growth affected by physical and human capital accumulation?

Using the latest available data and semiparametric methods, we investigate how human and physical capital accumulation affects the relationship between income inequality and subsequent economic growth. We find that higher income inequality generally reduces economic growth over the next 5-year period. Within nations possessing little human capital, this inequality-growth penalty is exacerbated by higher levels of physical capital, thus implying that as the returns to human capital rise relative to physical capital, inequality becomes more harmful to growth. This inequality-growth pattern does not hold in well educated nations.     

INEQUALITY OF SUBJECTIVE WELL‐BEING AS A COMPREHENSIVE MEASURE OF INEQUALITY

The link between happiness and overall inequality is best studied using an index that incorporates different aspects of inequality, and is measured consistently in different countries. One such index is the degree to which happiness itself varies among individuals. Its correlation with both happiness levels and social trust is substantially stronger than the corresponding correlation for income inequality. This remains so after allowing for bounded scale reporting, including a purely ordinal measure of dispersion. Moreover, the correlation is stronger for individuals who profess to care most about inequality. The link between happiness and inequality may thus be stronger than previously appreciated. (JEL I31, D6, D63, D31)     

Remittances and inequality: a dynamic migration model

We develop a model to study the effects of migration and remittances on inequality in the origin communities. While wealth inequality is shown to be monotonically reduced along the time-span, the short- and the long-run impacts on income inequality may be of opposite signs, suggesting that the dynamic relationship between migration/remittances and inequality may well be characterized by an inverse U-shaped pattern. This is consistent with the findings of the empirical literature, yet offers a different interpretation from the usually assumed migration network effects. With no need to endogenize migration costs through the role of migration networks, we generate the same results via intergenerational wealth accumulation.     

THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well-known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self-reported. Combined with lax enforcement on the part of the IRS, self-reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS-derived series systematically overstates top-income concentration in the interwar period. (JEL H2, N32, D31, E01)     

Trade Liberalization and Child Labor: A Case Study of Pakistan

The boom in industrial sector has lead to many problems and child labor is no exception. This study explores the linkages between trade liberalization and child labor both in short and long-run. The results suggest that GDP per capita and income inequality increase the child labor in the long-run but these results disappear in short-run. The study also finds that income inequality has positive and significant impact on child labor. Our findings also support that trade openness along with trade sanctions (imposed by the developed countries) are associated with the reduction in child labor in Pakistan.     

INCOME INEQUALITY: THE CONSEQUENCES OF SKILL‐UPGRADING WHEN FIRMS HAVE HIERARCHICAL ORGANIZATIONAL STRUCTURES

During the last three decades, most developed countries have experienced increasing income inequality. Using Danish register data from 1992 to 2007 for all private‐sector employees, we confirm that income inequality has increased in Denmark. We also observe an increase in the relative employment of highly educated individuals, as well as differential income growth rates across employee subgroups where, in particular, managers experienced significant real income progression. We use an equilibrium search framework with on‐the‐job search to study the interplay between skill‐upgrading, management compensation, and income inequality. In this model we can determine the management and education premia. We can also show that when our model is exposed to skill‐upgrading, it is capable of producing income dynamics similar to those observed in the Danish income distribution. (JEL J3, J6, M5)     

Equality of opportunity and the distribution of long-run income in Sweden

Equality of opportunity is an ethical goal with almost universal appeal. The interpretation taken here is that a society has achieved equality of opportunity if it is the case that what individuals accomplish, with respect to some desirable objective, is determined wholly by their choices and personal effort, rather than by circumstances beyond their control. We use data for Swedish men born between 1955 and 1967 for whom we measure the distribution of long-run income, as well as several important background circumstances, such as parental education and income, family structure and own IQ before adulthood. We address the question: in Sweden, given its present constellation of social policies and institutions, to what extent is existing income inequality due to circumstances, as opposed to ‘effort’? Our results suggest that several circumstances, importantly both parental income and own IQ, are important for long-run income inequality, but that variations in individual effort account for the most part of that inequality.