Income Inequality and Economic Growth: Evidence from American Data

Abstract

While most cross-country studies find a negative relationship between income inequality and economic growth, studies that use panel data suggest the presence of a positive relationship between inequality and growth. This paper uses a cross-state panel for the U.S. to assess the relationship between inequality and growth. Using both standard fixed effects and GMM estimations, this paper does not find evidence of a positive relationship between inequality and growth but finds some evidence in support of a negative relationship between inequality and growth. The paper, however, shows that the relationship between inequality and growth is not robust and that small differences in the method used to measure inequality can result in large differences in the estimated relationship between inequality and growth.

Keywords: Inequality, Endogenous Growth, Political Economy

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