INCOME INEQUALITY, ECONOMIC GROWTH, AND THE DISTRIBUTION OF INCOME GAINS: EVIDENCE FROM THE U.S. STATES

Authors


  • We are grateful to Mark Partridge, co-editor, and four anonymous referees for valuable comments, while stressing that none of them is responsible for any errors or omissions we may have in the paper. We acknowledge suggestions made by seminar participants at Oakland University, Centre for European Economic Research (ZEW), Midwest Economics Association Annual Meeting, and Western Economic Association Annual Conference. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

Abstract

ABSTRACT This paper first investigates a relationship between economic growth and income inequality using U.S. states data, a state cost-of-living deflator, and nonlinearity. It then explores the distribution of income gains among different income groups. We find that the impact of inequality on growth is nonlinear. Lowering inequality or increasing it substantially reduces growth; thus stable inequality may be good for growth. Economic growth affects incomes of the poor, the middle-income group, and the rich similarly with the elasticity of one. Education and labor market policies become important in promoting growth and improving income gains of the poor.

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