Does Income Distribution Affect U.S. State Economic Growth?*

Abstract

Numerous models propose an income-distribution/growth linkage, but the empirical evidence is ambiguous and depends on the regression approach. Mixed findings are not unexpected if there are differing short-and long-term responses. Approaches utilizing cross-sectional variation primarily reflect long-run effects, whereas those using time-series variation primarily reveal short-run effects. This study reconciles these issues using U.S. state data. After allowing for short-and long-run responses and for separate effects between the tails and middle of the distribution, the consistent pattern is the middle-class share and overall inequality are positively related to long-run growth. However, the short-run income-distribution response is less clear.

Tracking positive and negative effects of inequality on long-run growth

“…Some authors have also worked with different shares and ratios of the percentiles along the whole distribution of income. On one side, the percentage of the third quartile has been of particular interest to capture the weight of the middle class, on the basis that having a strong middle class boosts economic development (Easterly 2001;Partridge 2005). On the other side, the use of different percentile ratios allows for a focus on differentiated effects depending on the specific distributional forms of income (Voitchovsky 2005).…”

“…Appendix A lists the main papers providing empirical evidence for the different channels, the variables they use as proxy for the channel, and the effect they find either on growth or investment. Seminal works are Perotti (1994Perotti ( , 1996, Persson and Tabellini…”

“…On the contrary, when panel data sets are considered, the negative effects disappears and even becomes positive when fixed effects or GMM methods are used. Partridge (2005) has criticised the used of fixed effects methods for the analysis of such relationship, as inequality is a highly persistent variable over time. Similarly, Barro (2000) maintains that fixed effects estimates exacerbate the bias due to measurement error.…”

“…However, Davis (2008) has revalidated the relevance of scale effects, particularly in developing countries, and several other authors have provided evidence of the relevance of the size of the middle class (Easterly 2001;Partridge 2005). Regarding the endogenous fertility approach, several studies provide evidence on the positive link between inequality and fertility rates (Perotti 1996;Koo and Dennis 1999;Kremer and Chen 2002) and a negative effect of fertility rates on growth (Barro 2000).…”

Isolating the Effect of Natural Amenities on Population Change at the Local Level

“…A similar selection of variables is found throughout the empirical literature on population change specific to amenity effects (cf. CARLINO and MILLS, 1987;CARRUTHERS, 2003;DALENBERG and PARTRIDGE, 1997;GLAESER and SHAPIRO, 2003;NAUDE and KRUGELL, 2006;PARTRIDGE, 2005;POUDYAL et al, 2008;and SHUMWAY and DAVIS, 1996). These variables can be characterized within the broad categories of demographic characteristics, socio-economic conditions, physical infrastructure, environmental and geophysical factors, cultural resources, and potential legal constraints.…”