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)     

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)     

WHO PAYS THE BAR TAB? BEER CONSUMPTION AND ECONOMIC GROWTH IN THE UNITED STATES

Few studies explore the linkages between health behaviors and macroeconomic outcomes. This study uses 1971–2007 state‐level data from the United States to estimate the impact of beer consumption on economic growth. We document that beer consumption has negative effects on economic growth measures once the endogeneity of beer consumption is addressed. Our estimates are robust to a range of specification checks. These findings run parallel to a large body of literature documenting substantial social and economic costs stemming from alcohol use. (JEL I1, O4)     

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)     

INEQUALITY AND GROWTH IN THE UNITED STATES: EVIDENCE FROM A NEW STATE-LEVEL PANEL OF INCOME INEQUALITY MEASURES

This paper introduces a new comprehensive panel of annual state-level income inequality measures spanning the postwar period 1945–2004. For many states, the share of income held by the top decile experienced a prolonged period of stability after World War II, followed by a substantial increase in inequality during the 1980s and 1990s. This paper also presents an examination of the long-run relationship between income inequality and economic growth. Our findings indicate that the long-run relationship between inequality and growth is positive in nature and driven principally by the concentration of income in the upper end of the income distribution. ( JEL D31, O40)     

Household wealth and the measurement of economic well-being in the United States

We analyze the level and distribution of economic well-being in the United States during the 1980s and 1990s based on the standard measure of money income and a measure in which income from wealth is calculated as the sum of lifetime annuity from nonhome wealth and imputed rental-equivalent for owner-occupied homes. Over the 1982–2000 period, median well-being increases faster when these adjustments are made than when standard money income is used. This adjustment also widens the income gap between African-Americans and whites but increases the relative well-being of the elderly. Adding imputed rent and annuities from household wealth to household income considerably increases measured inequality and the share of income from wealth in inequality. However, both measures show about the same rise in inequality over the period. We also find an increasing share of wage and salary income in our expanded definition of income among the richest 1% over the period but do not find that the “working rich” have largely replaced rentiers at the top of the economic ladder.      

INCOME INEQUALITY: THE IMPLICATIONS OF ECONOMIC STRUCTURE AND SOCIAL CONDITIONS

During the past few decades income inequality has been increasing in the United States and other developed nations, and is having major social consequences. In this study county-level data for the United States was analyzed to test the relative importance of three alternative approaches for explaining increased levels of inequality. These three approaches include economic structure, social conditions, and a model that maintains that both social conditions and inequality are a function of economic structure. The results revealed that social conditions were much more strongly related to inequality than economic structure and little support was found for the theoretical model. The two social conditions most strongly related to inequality included female employment and the percent of female-headed households. Counties with high levels of female employment tended to have low levels of inequality, while counties with high proportions of female-headed households tend to have high levels of inequality. The implications of these findings are discussed.     

THE DEVELOPMENTAL EFFECT OF STATE ALCOHOL PROHIBITIONS AT THE TURN OF THE TWENTIETH CENTURY

We examine the quasi‐randomization of alcohol consumption created by state‐level alcohol prohibition laws passed in the United States in the early part of the twentieth century. Using a large dataset of World War II enlistees, we exploit the differential timing of these laws to examine their effects on adult educational attainment, obesity, and height. We find statistically significant effects for education and obesity that do not appear to be the result of pre‐existing trends. Our findings add to the growing body of economic studies that examine the long‐run impacts of in utero and childhood environmental conditions. (JEL I18, D10, N41, N42)     

TIME PREFERENCE AND THE DISTRIBUTIONS OF WEALTH AND INCOME

This paper examines the connection between time preference heterogeneity and economic inequality in a deterministic environment. Specifically, we extend the standard neoclassical growth model to allow for (1) heterogeneity in consumers' discount rates, (2) direct preferences for wealth, and (3) human capital formation. The second feature prevents the wealth distribution from collapsing into a degenerate distribution. The third feature generates a strong positive correlation between earnings and capital income across consumers. A calibrated version of the model is able to generate patterns of wealth and income inequality that are very similar to those observed in the United States. (JEL D31, E21, O15)     

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)     

Effect of Educational Expansion on Educational Inequality in Post-industrialized Societies: A Cross-cultural Comparison of Japan and the United States of America

Abstract: This paper analyzes the relationship between educational expansion and educational inequality. I first reconsider the conceptual basis of educational expansion, noting that in post‐industrialized societies, people's educational attainment is no longer measurable in a simple temporal increase because of the recent leveling‐off in the younger generation. I then review the theoretical framework of educational inequality. After presenting a summary of related studies, I provide a multilevel regression model that examines the macro/cohort influence of educational expansion on educational inequality in Japan and the United States. The following propositions are derived from my analyses: Educational expansion has functioned to dissolve both the socio‐economic and the cultural‐educational reproduction processes in Japan; meanwhile, inequality in terms of micro coefficients remains. In the United States, both the magnitude of gender inequality and the influence of the socio‐economic reproduction process are smaller than in Japan. The macro/cohort effects of educational expansion are generally smaller in the United States. This is true despite the fact that educational expansion significantly dissolves gender inequality in the United States, while educational expansion has little to do with gender equalization in Japan. My comparison of the model's fit concludes that the trajectory of educational equalization follows the two‐fold consequence of educational expansion. In sum, these results show that in conjunction with the non‐linear sequence of educational attainment in the post‐industrialized phase of development, the macro/cohort influence of educational expansion as well as the micro structure of educational inequality undergo gradual transformations.     

CONSOLIDATING THE EVIDENCE ON INCOME MOBILITY IN THE WESTERN STATES OF GERMANY AND THE UNITED STATES FROM 1984 TO 2006

The cross‐national intragenerational literature has often analyzed income mobility within short time periods over which mobility might reasonably be thought of as invariant. Here, we argue that a great social transformation—German reunification—abruptly and permanently altered mobility. Using standard measures (with panel data for the western states of Germany and the United States) over the period 1984–2006, we find the conventional result that income mobility is greater in Germany. But when we cut the data into 5‐year windows, we find that income mobility declines significantly over the years immediately following reunification in Germany but not in the United States, using both measures. (JEL J1, J6)     

IMMIGRANTS' GENES: GENETIC DIVERSITY AND ECONOMIC DEVELOPMENT IN THE UNITED STATES

This paper examines the relationship between immigrants' genetic diversity and economic development in the United States during the late nineteenth and the beginning of the twentieth centuries, a period commonly referred to as the age of mass migration from Europe to the New World. Our panel model estimates show that during this period, immigrants' genetic diversity is significantly positively correlated with measures of U.S. counties' economic development. There exists also a significant positive relationship between immigrants' genetic diversity in 1870 and contemporaneous measures of U.S. counties' average income. (JEL J11, O51, Z13)     

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)     

A New Kuznetsian Dynamic: The Knowledge Economy and Income Inequality in the United States, 1917–2008

The rise of the knowledge economy resulted in higher levels of income inequality in the United States and forced many to question the Kuznets Inverted‐U hypothesis. However, this study argues that the establishment of a knowledge economy does not negate the importance of employment shifts for income inequality. Instead, the expansion of knowledge employment alters the major sectors that are responsible for the overall distribution of income. To this end, this article presents the key argument that the current service–knowledge transition impacts income inequality trends, of today, in a way that is similar to the agricultural–industrial transition, of the past. According to the autoregressive conditional heteroskedasticity regressions, the agricultural–industrial transition returns stronger associations with income inequality in the United States before 1950. The agricultural–industrial transition's impact diminishes thereafter as the service–knowledge transition shares a more robust association with income inequality after 1980.     

Growth,Inequality and Poverty in Emerging and Transition Economies

This paper aims to explore the quality of economic growth in a sample of 50 emerging and transition economies (ETEs), which are countries experiencing a process of fast growth and institutional change. Economic growth during 1995–2006 is regressed against poverty, inequality and human development variables using OLS cross-country regression models. The main findings are that growth did not reduce poverty and income inequality worsened too. On the one hand, economic growth occurred despite the worsening of income inequality. However, this result does not identify a “U-shaped” Kuznets curve because even after a consistent period of growth, inequality did not decrease and it remained at higher levels. Only countries with higher education levels and public expenditure in strategic dimensions seem to escape from this trap. On the other hand, growth occurred at the expense of an important human development variable i.e., life expectancy, and of an important indicator of democracy, i.e., voice and accountability.     

FINANCIAL DEVELOPMENT AND WAGE INEQUALITY: THEORY AND EVIDENCE

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the United States since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation, and wage dispersion between skilled and unskilled workers. The experience of U.S. states following banking deregulation provides empirical support for our hypothesis. We find that wages of skilled workers increased by between 0.5% and 6.3% following deregulation while those of unskilled workers fell by between 3.5% and 8.7%. Similarly, residual (or within‐group) inequality increased; the 90–50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.2% and 1.7%, respectively. (JEL E25, J31, G24)     

How do labour laws affect unemployment and the labour share of national income? The experience of six OECD countries, 1970–2010

Using longitudinal data on labour law in France, Germany, Japan, Sweden, the United Kingdom and the United States over the period 1970–2010, the authors estimate the impact of labour regulation on unemployment and the labour share of national income. Their dynamic panel data analysis distinguishes between the short‐run and long‐run effects of regulatory change. They find that worker‐protective labour laws in general have no consistent relationship to unemployment but are positively correlated with labour's share of national income. Laws specifically relating to working time and employee representation are found to have beneficial effects on both efficiency and distribution thus proxied.     

Is America coming apart? Socioeconomic segregation in neighborhoods,schools, workplaces,and social networks, 1970–2020

As income inequality in the United States has reached an all-time high, commentators from across the political spectrum warn about the social implications of these economic changes. America, they fear, is “coming apart” as the gap between the rich and poor grows into a fault line. This paper provides a comprehensive review of empirical scholarship in sociology, education, demography, and economics in order to address the question: How have five decades of growing economic inequality shaped America's social landscape? We find that growing levels of income inequality have been accompanied by increasing socioeconomic segregation across (1) friendship networks and romantic partners, (2) residential neighborhoods, (3) K-12 and university education, and (4) workplaces and the labor market. The trends documented in this review give substance to commentators' concerns: compared to the 1970s, rich and poor Americans today are less likely to know one another and to share the same social spaces. The United States is a nation divided.     

WHAT MOTIVATES POLITICAL PREFERENCES? SELF‐INTEREST,IDEOLOGY, AND FAIRNESS IN A LABORATORY DEMOCRACY

Substantial prior literature has established that subjects in laboratory experiments are typically willing to sacrifice their own well being to make financial allocations more equal among participants. We test the applicability of this result in an environment that contains some of the key contextual issues that are usually excluded from more abstract games, but which might be important in situations involving income redistribution. Our general finding is that votes for a redistributive tax are almost entirely in accordance with self‐interest: above‐average earners vote for low tax rates and below‐average earners vote for high tax rates. A measure of subjects' preferences for fairness or equality, their self‐reported economic ideology, is not directly related to their voting behavior in this experiment. Because the ideology measure should be correlated with any intrinsic preferences regarding inequality aversion, we conclude that any preferences for fairness or inequality that our subjects possess are not strong enough to overcome self‐interest in this context. We do, however, find evidence for a possible indirect effect of ideology on choice behavior in that more conservative subjects tend to be more responsive to their self‐interest than the more liberal subjects. (JEL C90, D63)