Income Inequality and Economic Growth: Evidence from American Data

Abstract

Cross-country studies have found a negative relationship between income inequality and economic growth. The main problem with the cross-country analyses is the poor quality of the data on income distribution. This paper tests the robustness of the cross-country results to the use of a more accurate cross-state data-set. Data from the US states confirm the negative relationship between income inequality and growth. The same data-set is used to run structural estimations aimed at testing several possible channels linking inequality to growth. Although the results are not as strong as in the case of the reduced form estimations, the paper finds some evidence in support of a fiscal channel linking inequality to growth.

JEL Classification: D31, E62, P16, O41, I22