An Empirical Test of the Institutionalist View on Income Inequality: Economic Growth within the United States

Article excerpt

CAROLYN B. RODRIGUEZ [*]

ABSTRACT. This paper analyzes the relationship between income inequality and economic growth within the United States using state level data. It describes income inequality in the U.S. since 1960, then employs a two-step causal model to test the institutionalist contention that income inequality leads to socio-political instability, which has a negative impact on economic progress. The empirical results offer support for the institutionalist view.

I

Introduction

EMPIRICAL WORK INVESTIGATING THE HYPOTHESIS that increases in income inequality leads to reduced economic growth has almost exclusively been performed using nations as the unit of analysis. At the same time, empirical examinations of the effects of increasing income inequality on economic growth at the sub national level are sparse. James T. Peach (1987) called for more empirical studies addressing the relationship between income distribution and economic growth within the institutionalist framework, noting "since institutionalism is a 'fact-based' theory, more such studies should be encouraged". [1] He also questioned the use of national level data as the unit of analysis, particularly for large nations, citing that "regional differences in inequality are often hidden." [2] This paper responds to his suggestions by offering a description of income inequality at the state level since 1960 and empirical testing of the institutionalist view of the negative consequences of income inequality on economic growth.

The first section of this study summarizes work describing patterns of income inequality growth within the United States from 1960 to the mid-1990s. The second section examines the institutionalist theory of income distribution with particular focus on its effect on economic progress. The third section provides an empirical test of the effect of increased income inequality on economic progress using an institutionalist model constructed by Kang H. Park (1996).

II

The Growth of Income Inequality within the United States

DATA PROVIDED FOR THE U.S. show that the lowest twenty percent of families are sharing a smaller and smaller percentage of the total family income pie, while the richest fifth's share is growing, particularly since the late 1980s [3] (Weinberg, 1996). This may still leave some to ponder which states are experiencing the largest growth in income inequality. Partridge, Partridge, and Rickman (1998) examined the increases in family income inequality in the 48 contiguous states from 1960 to 1990 using the Gini coefficient and U.S. Census data. In general they found that family income inequality fell through the 1960s, increased steadily in the 1970s, then grew sharply after 1980. [4] New England, Pacific states, and some western states had the lowest income inequality in 1960, while the South Atlantic and South Central states had the highest. By 1970, the regional patterns shifted. The South Atlantic, East South Central, and West South Central states had the lowest income inequality, while the Northeast, Western, Mountain, and East North Central states had the most. This pattern continued through 1990.

While the work by Partridge, Partridge, and Rickman sheds light on regional differences in income inequality within the U.S., it does not actually show that the poor are getting poorer, while the rich are getting richer. Larin and McNichol (1997) find that, between 1978 and 1996, 48 states experienced increased income inequality. Using pooled time series data on families with children for the periods of 1978-80 and 1994-96, they show that in 44 states the bottom fifth of families grew poorer while the top fifth grew richer. In ten of these states the average income of the bottom quintile of the income distribution dropped by more than 30%. [5] By contrast, in 31 states the top quintile experienced average family income gains over 20%.

Average incomes did not fall in every state, however. …