Economic Freedom and Growth in U.S. State-Level Market Incomes at the Top and Bottom

Abstract

This paper investigates the relationship between economic freedom and income growth and inequality across U.S. states over the period 1979 to 2011. The focus is on market income at the top and bottom of the income distribution. Results show that increases in overall freedom are associated with average income growth. When viewed separately, an increase in overall freedom is associated with larger income growth rates for income earners in the bottom 90% relative to the top 10%. Interestingly, results show that increases in overall economic freedom are related to larger relative growth rates for top 10% incomes within high income states, and larger relative growth rates for bottom 90% incomes within low income states. Top-to-bottom income ratio regressions suggest a negative and statistically significant relationship between economic freedom and income inequality.

Keywords: Inequality, Economic Freedom, Regulation, Spatial dependence, U.S. states

JEL Classification: D63, H11, L51