Academic journal article Contemporary Economic Policy

State Patterns in Family Income Inequality

Academic journal article Contemporary Economic Policy

State Patterns in Family Income Inequality

Article excerpt

I. INTRODUCTION

The sharp increase in U.S. income inequality in the 1980s has renewed interest in this issue. Recent studies of U.S. income inequality often focus on labor market changes including increased returns to skill, experience, and education (e.g., Katz and Murphy, 1992; Freeman and Katz, 1994), as well as changing demographics (e.g., Blank and Hanratty, 1992). In fact, even within narrowly defined experience/education categories, income inequality has increased.

A much less studied aspect of inequality is the tremendous change in traditional state and regional income inequality patterns. For instance, regions associated with low family income inequality in the 1960s subsequently experienced rapid increases in income inequality. Even within regions, there have been significant changes. For example, industrial Midwestern states experienced some of the largest increases in income inequality after 1970, while Plains states experienced some of the smallest increases.

Following a recent trend, this study takes advantage of cross-sectional variation found in state-level data to extend studies based solely on national data (Karoly and Klerman, 1994; Partridge et al., 1996). National-based studies (without state-level data) of income inequality usually are cross-sectional from a single period (with micro data) or represent time-series data for an individual nation. Cross-sectional studies from a single (or short) period cannot adequately explain time-series trends. Likewise, because of limited degrees of freedom associated with time-series data for a nation, sorting out causal relationships from spurious relationships is difficult. By contrast, pooled cross-sectional state-level data contain many more degrees of freedom and allow the use of time dummies to account for national secular trends. This greatly reduces the chance that the regression coefficients reflect spurious correlations with income inequality. Finally, pooled cross-sectional data allow us to estimate the unique state fixed effects, which are the inequality differences that remain after controlling for other factors.

In recent years, a few income inequality studies have used state- or regional-level data. These studies suggest that interstate differences in inequality can be explained by recent foreign immigration, labor-force participation rates, and the share of female-headed families (Topel, 1994; Karoly and Klerman, 1994; Levernier et al., 1995; Partridge et al., 1996). These studies find much less support for the argument that other factors such as declining unionization and manufacturing are important explanations.

The analysis here pays special attention to two possible causes of interstate income inequality differences that remain relatively unexplored in previous research. The first is state and local economic development policies. Given the current trend for devolution of government power to the states, an important issue is whether state and local governments can influence income inequality. Social and cultural norms are the second unexplored factor. One reason for this lack of emphasis is that economists generally downplay nonmarket institutional factors. Yet, this may be an important omission regarding spatial differences in inequality. For example, compare the United States and Canada (Card and Freeman, 1994). Although the U.S. and Canadian economies are very similar in terms of economic structure and workforce characteristics, the United States has experienced a much faster increase in income inequality in recent decades, suggesting social/cultural and institutional differences between the countries.

If social and cultural factors help explain interstate differences in income inequality, economists must consider some important implications. Most importantly, if social and cultural factors help explain (cross-sectional) differences in income inequality for states, they also may explain national increases in inequality over time as well as why countries have experienced such diverse income inequality trends. …

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