The Great Divide: Regional Inequality and Fiscal Policy

Abstract

Growing regional inequality within countries has raised the perception that 'someplaces and people' are left behind. This has prompted a shift toward inward-looking policies andaway from pro-growth reforms. This paper presents novel stylized facts on regional inequality forOECD countries. It shows that regional disparity in per-capita GDP is large (even after adjustingfor regional price differences), persistent, and widening over time. The paper also finds thatrising nationwide income inequality is associated with both rising within-region incomeinequality and widening average income across regions. The rise in inequality is related todeclining incentives for interregional labor mobility, especially for poor households in laggingregions, which are estimated to reduce by as much as one-third in the United States. Againstthese facts, the paper proposes a framework to identify whether, how and by whom fiscal policiescan be used to tackle regional inequality. It outlines conditions under which those policies shouldbe spatially-targeted and illustrates how they can be complementary to conventional means-testingmethods in mitigating income inequality.

Keywords: Cost of living, National income, Social security, Development, Social indicators, Regional inequality, fiscal redistribution, mobility, intergovernmental relations, regional disparity, means-testing, lead region, OECD country

JEL Classification: D63, E62, H20, H77, R12, R23, E01, Z13, E2, I3, H7