The relationship between inequality and labor market performance: Evidence from U.S. states |
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Authors: | Mark D Partridge |
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Institution: | (1) University of Saskatchewan, S7N 5A8 Saskatoon, SK, Canada |
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Abstract: | 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. |
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