IS INCOME INEQUALITY ENDOGENOUS IN REGIONAL GROWTH? Yohannes G. Halu 1 Mulugeta S. Kahsa 2 Tesfa G. Gebremedhn 3 Randall W. Jackson 4 RESEARCH PAPER 2009-1 Abstract Ths study focuses on testng the relatonshp between ncome nequalty and growth wthn U.S. countes, and the channels through whch such effects are observed. Based on a system of equatons estmaton, the emprcal results confrm the hypotheses that ncome nequalty has a growth dampenng effect; ncome nequalty s endogenous to regonal growth and growth adjustment; and the channels through whch ncome nequalty determnes growth are regonal growth adjustments, such as mgraton and regonal adjustment n job and ncome growth. Results have numerous polcy mplcatons to the extent that: (1) that ncome nequalty s endogenous, ts equlbrum level can be nternally determned wthn a regonal growth process; (2) tradtonal ncome nequalty mtgatng polces have ndrect effect on overall regonal growth, they may have unntended ndrect effects on ncome nequalty; and (3) regonal growth adjustment also equlbrates ncome nequalty, such forces can be utlzed as polcy nstruments to mtgate ncome nequalty, and ts growth dampenng effects hence forth. Key Words: Income nequalty, economc growth, Gn coeffcent, growth modelng, populaton change, per capta ncome. 1 Vstng Assstant Professor and Assocate Drector of the Hannah Professor Research Program, Land Polcy Insttute, 305 Manly Mles Buldng,1405 South Harrson Road, Mchgan State Unversty, East Lansng, MI 48823. 2 Graduate Research Assstant, Regonal Research Insttute and Ph.D. canddate, Dvson of Resource Management, West Vrgna Unversty, P. O. Box 6825, Morgantown, WV 26506-6825. 3 Professor, Dvson of Resource Management, Dvson of Resource Management, Davs College of Agrculture, Forestry, and Consumer Scences, P. O. Box 6108, West Vrgna Unversty, Morgantown, WV 26506 4 Drector and Professor, Regonal Research Insttute, West Vrgna Unversty. P. O. Box 6825, Morgantown, WV 26506-6825. * Selected Paper presented at the Southern Agrcultural Economcs Assocaton Annual Meetng, Atlanta, Georga, January 31-February 3, 2009
IS INCOME INEQUALITY ENDOGENOUS IN REGIONAL GROWTH? Introducton Income dstrbuton and ts mpact on the trend and pattern of economc growth has been a topc of contenton n the lterature. Whle numerous cross-country analyses revealed negatve effects of nequalty on growth, numerous studes emerged and provded evdence on a postve relatonshp. From an economc polcy perspectve, closer and better understandng of the lnks between ncome nequalty and economc growth provdes valuable polcy nsghts. For nstance, whle evdence suggestng a negatve relatonshp may encourage an economc development polcy and strategy that targets ameloratng nequalty, evdence of a postve relatonshp may suggest a non-aggressve dstrbutonal polcy to mantan economc growth wthn an exstng nequtable ncome dstrbuton. Therefore, better understandng of the ncome nequaltyeconomc growth lnkage and the channels through whch such lnks are equlbrated remans crucal n nformng economc development and dstrbutonal polces. Income nequalty s determned by many factors, ncludng functonng of market systems, publc polcy, household choces, labor market condtons, human captal, growth rate of job and other opportuntes, etc (Rubn, et al 2000; Burtless, 1990; Levy and Murnane, 1992; Becker 1991). Numerous studes that utlzed cross-country tme seres data analyss suggest that greater ncome nequalty could have negatve mpacts on the trend of economc growth (Alesna and Rodrk 1994, Persson and Tabelln 1994, Alesna and Perott 1996, Dadkhah 2003, Davs 2007). In an ntra-country regonal analyss, Halu, et al. (2008) also found a negatve relatonshp. 1
Equally as mportant s explanaton of the channels through whch ncome nequalty lowers growth performance. Some nsghts for the nverse relatonshp between nequalty and growth n these studes are summarzed by Aghon, et al. (1999). The study dscusses that ncome nequalty reduces nvestment opportuntes, worsens borrowers ncentves, fuels poltcal nstablty, and creates macroeconomc volatlty and as a result, through approprate channels, mpacts economc growth. Based on earler works of Lews (1954) and Kaldor (1957), numerous other studes, based on cross-country panel data analyss, establshed a postve relatonshp between ncome nequalty and economc growth (Pasnett 1962, Bourgugnon 1981, L and Zou 1998, Forbes 2000). In an ntra-country Southern U.S. regonal analyss, Ngarambe et al., (1998) also found a postve relatonshp between ncome growth and ncome nequalty. The channel through whch a postve nequalty-growth relatonshp could be observed s often argued from the perspectve that the margnal propensty to save between hgher and lower ncome groups s dfferent. Gven that nvestment s a postve functon of savng, ncome nequalty wll be assocated wth growth. For nstance, an unequal ntal ncome dstrbuton, wth convex savng functons, can lead to growth n aggregate output (Bourgugnon 1981). A growng lst of lterature provdes another nsght nto the nequalty-growth debate by forwardng an alternatve hypothess that the relatonshp s non-lnear over tme. These studes suggest that growth rate s a non-lnear functon of nequalty, specfcally an nverted U functon of ncome nequalty (Gupta and Sngh 1984, Aghon and Bolton 1997, Banerjee and Duflo 2003). Thus nequalty ntally leads to fast growth, but gradually constrants t. A number of studes also found no relatonshp between ncome nequalty and growth performance (Lozer 1993, Baro 2000). Moreover, based on extensve lterature revew, Benabou 2
(2000) noted that OLS based estmaton to dentfy the effect of nequalty on economc growth found negatve relatonshps. Banerjee and Duflo (2003) also noted that fxed-effects panel regresson based studes found postve relatonshps; whle 3SLS based estmatons have nsgnfcant results. Gven the wde array of dvergent fndngs, numerous hypotheses on the channels through whch nequalty nfluences growth, and the dvergence n fndngs based on modelng and estmaton framework, re-examnng the nature of relatonshp between ncome nequalty and growth from alternatve frameworks and estmaton approaches adds value to the dscusson and the polcy mplcatons thereof. The man goal of ths paper s to examne the relatonshp between nequalty and economc growth performance, and the channels through whch such relatonshps can be affected. To accomplsh these goals, the study: (1) focuses on U.S. county level data for 1990 and 2000 to explan the ntra-country relatonshp between nequalty and growth wthn smlar legal, nsttutonal, and market condtons; (2) utlzes an augmented regonal growth model that relates ncome nequalty to patterns n ncome, employment and populaton growth hence dentfyng moblty of people and changes n job and ncome growth across regons as equlbratng forces between nequalty and growth; (3) endogenzes ncome nequalty wthn a regonal growth framework, so that not only does ncome nequalty determnes growth, but regonal growth patterns endogenously determne subsequent ncome nequalty; and (4) followng a systems of equatons approach wth a two-stage-least-squares estmaton procedure, provdes robust estmaton of the nequalty and growth relatonshp. The central hypotheses to be tested n ths study are: 1. Income nequalty negatvely mpacts regonal growth. 3
2. The channel through whch ncome nequalty nfluences growth performance s regonal adjustment n mgraton, job opportuntes and ncome growth. 3. Income nequalty s not exogenous, and hence s determned smultaneously wthn a regon growth adjustment process. Methodology Departng from most of earler modelng work used to test the effect of ncome nequalty on economc growth, we focus on regonal economc framework. Modelng the relatonshp between economc growth and ncome nequalty from a regonal economc perspectve requres the proper understandng of the factors that affect dfferences n regonal economc growth. Investgatng the relatonshp between ncome nequalty and growth usng a regonal growth framework has a number of advantages. Frst, a regonal approach adds value by explctly establshng lnks between regonal mgraton patterns, dfferences n regonal job creaton, and ther mpact on ncome growth, along wth consderaton of ncome nequalty. Second, apart from many studes that focus on cross-country comparsons, cross-regonal assessment of the mpact of ncome nequalty on growth provdes addtonal explanatons on the pathway through whch ncome nequalty can mpact economc growth. Part of the explanaton on how nequalty results n slower economc growth can be found n cross-regonal mgraton choces and employment creaton dfferences that mght be ndrectly affected by ncome nequalty. Thrd, a regonal approach can provde polcy relevant parameters that can be targeted at the regonal and sub-regonal levels to mtgate the effect of ncome nequalty on economc growth, or to target mnmzaton of ncome nequalty tself. Fundamentally, populaton, employment and ncome growth over tme can determne the nature of regonal economc growth. Regonal scence lterature establshes endogenety n 4
populaton, employment, and ncome growth n a regon (Roback 1982, Carlno and Mlls 1987, Duffy-Deno 1998, Deller et al., 2001). Growth equlbrum modelng enables to smultaneously estmate these endogenous growth varables and allow examnaton of the relatonshp of ncome nequalty and growth wthn the broader regonal framework. Followng the early work of Carlno and Mlls (1987) and further developments by Deller et al. (2001), a smultaneous growth equlbrum model can be specfed as: PCI (1) PCI * = f ( POP*, E *, G * Ω ) (2) POP* = f ( E *, PCI *, G * Ω ) POP E (3) E * = f ( POP*, PCI *, G * Ω ) G (4) G * = f ( POP*, PCI *, E* Ω ) where PCI *, POP *, E * and G* refer to equlbrum levels of per capta ncome, populaton, employment, and ncome nequalty, respectvely; Ω PCI, Ω POP, Ω E and Ω G refer to vectors of other exogenous varables havng a drect or ndrect relatonshp wth per capta ncome, populaton, employment, and ncome nequalty, respectvely. Table 1 provdes defntons and descrptons of these exogenous varables and ther summary statstcs. Populaton and employment are lkely to adjust to ther equlbrum values wth substantal lags (Mlls and Prce 1984). Smlarly, per capta ncome also adjusts to ts equlbrum value wth lags. Therefore, the dstrbuted lag equatons may be specfed as: (5) PCI = PCI + λ PCI * PCI ) ( t 1) PCI ( ( t 1) (6) POP = POP + λ POP * POP ) ( t 1) POP( ( t 1) (7) E = E + λ E * E ) ( t 1) E( ( t 1) (8) G = G + λ G * G ) ( t 1) G( ( t 1) 5
Where λ PCI, λ POP, λ E and λ G are speed-of-adjustment coeffcents wth 0 λ PCI, λ POP, λ E, λ G 1, and t-1 s a one perod lag. Ths ndcates that current per capta ncome, populaton, employment, and ncome nequalty are dependent on ther one perod lags and on the change between equlbrum values and one lag perod values adjusted at speed-of-adjustment values of λ PCI, λ P, λ E and λ G. Rearrangng terms: (9) ΔPCI = λ PCI * PCI ) PCI ( ( t 1) (10) ΔPOP = λ POP * POP ) POP( ( t 1) (11) ΔE = λ E * E ) E ( ( t 1) (12) ΔG = λ G * G ) G( ( t 1) where ΔPCI, ΔPOP, ΔE and ΔG are changes n per capta ncome, populaton, employment, and ncome nequalty, respectvely. Wth substtuton and rearrangng of terms, the equatons of the model n lnear form can be specfed as: PCI (13) ΔPCI = + β PCI + β ΔPOP+ β ΔE + β ΔG + δ Ω + ε α1 1PCI ( t 1) 2PCI 3PCI 4PCI POP (14) ΔPOP = + β POP + β ΔE + β ΔPCI + β ΔG + δ Ω + υ α2 1POP ( t 1) 2POP 3POP 4POP E (15) ΔE = + β E + β ΔPOP + β ΔPCI + β ΔG + δ Ω + ϑ α3 1E ( t 1) 2E 3E 4E G (16) ΔG = + β G + β ΔPOP + β ΔE + β ΔPCI + δ Ω + ϖ α4 1G ( t 1) 2G 3G 4G Equatons (13) through (16) ndcate that per capta ncome, populaton, employment and ncome nequalty changes are dependent on ther ntal levels and changes of the other two endogenous varables, and vectors of other varables that affect the endogenous varables n the system. In such a system, the smultaneous nteracton of changes n per capta ncome, PCI E G POP 6
populaton, employment and ncome nequalty can be dentfed. More mportantly, the effect of ncome nequalty on changes n per capta ncome and other growth ndcators can be dentfed. In estmatng the system n equatons (13) through (16), the dentfcaton condton needs to be satsfed. Followng the order condton of dentfcaton, f M EX, where M s the number of rght hand sde endogenous varables n a gven equaton, and EX s the number of excluded exogenous varables from a gven equaton when compared to other equatons n the system, then the order condton of dentfcaton s satsfed. Followng the emprcal estmaton ndcated n Table 2, one can easly determne that all equatons n the system are dentfable usng the order condton,.e., 3 3 for the populaton change equaton, 3 3 for the employment change equatons, 3 3 for the per capta ncome change equaton, and 3 6. The rank condton gves a more strngent condton on dentfcaton. In ths case, f EMX #M-1, where EMX s the number of excluded endogenous and exogenous varables n a gven equaton compared to other equatons n the system, and #M-1 s the total number of endogenous varables n the system mnus one, then the rank condton s satsfed. Agan followng the emprcal specfcaton ndcated n Table 2, one can determne that all equatons n the system are dentfable usng the rank condton,.e., 4 (4-1) for the populaton change equaton, 4 (4-1) for the employment change equatons, 4 (4-1) for the per capta ncome change equaton, and 7 (4-1) for the ncome nequalty change equaton. 7
Table 1. Defnton and Descrptve Statstcs of Varables, US Countes (N=3038) Varable Defnton Mean Std Dev Endogenous Varables ΔPCI Change n Per Capta Income (PCI 00 PCI 90 ) 7753.29 2972.28 ΔPOP Change n populaton (POP 00 POP 90 ) 10421.94 38581.97 ΔE Change n employment (EMP 00 EMP 90 ) 4606.49 15681.67 Δ GINI 5 Change n Gn Coeffcent (Gn 00 Gn 90 ) 0.0545 0.0255 Intal Condtons POP 90 Populaton n 1990 77308.34 260475.8 EMP 90 Employment n 1990 35973.04 124875.2 PCI 90 Per Capta Income n 1990 15239.09 3446.40 GINI 90 Gn Coeffcent n 1990 0.379 0.0384 Fscal, Socal, and Economc Factors UNEMRT 90 Unemployment rate n 1990 6.19 2.95 PMINRTY 90 Percent of Mnorty Populaton n 1990 12.26 15.17 BACHDG 90 Per cent of 25 years and older populaton wth Bachelor s Degree + 13.35 6.40 GPERCAP 92 Government drect expendture per person n 1992 1853.48 707.58 PCTAX 90 Per capta local taxes n 1990 649.63 425.86 P65PLUS 90 Per cent of populaton wth age 65 and above n 1990 14.97 4.34 P25_34P 90 Per cent of populaton wth age 25-34 n 1990 15.08 2.11 NTMIG 90 Net Mgraton n 1990 239.76 2846.79 PURBN 90 Percent of Urban Populaton n 1990 35.65 29.06 SCPTL 6 90 Socal Captal ndex 1990 0.0034 0.673 MEDHVA 90 Medan housng value n 1990 52904.6 31417.31 PHVCNT 90 Percent of Vacant Houses n 1990 14.86 10.53 PHSEAS 90 Percent of Seasonal Houses n 1990 5.71 9.45 HWYDEN 90 Hghway densty n 1990 608.46 529.55 ALLRDN 90 All other Road densty 1990 3342.93 2659.43 PTVLT 90 Percent of Populaton wth Travel Tme above 45 Mnutes n 1990 10.52 6.48 5 Data of Gn coeffcents are from two sources. Gn 1990 s from Francos Nelsen (2002), Department of Socology, Unversty of North Carolna and Gn 2000 s from Mark L. Burkey (2006) Gn Coeffcents for the 2000 census NCA&T State Unversty, NC. Even though, there are some dfferences n the classfcaton of groupng (The dfferences are upper lmt n 1990 s 150,000 but 175,000 n 2000), both used census data and followed smlar methodology to calculate the Gn coeffcent (Lorenz curve). 6 The socal captal ndex used s developed usng prncpal component analyss by Rupasngha, Goetz, and Freshwater (2006) and s avalable onlne at: http://www.nercrd.psu.edu/socal_captal/ndex.html 8
TYPES AND SOURCES OF DATA The study uses data of 3038 U.S. countes drawn from several sources. The study wll construct and use county level data of change n populaton, employment, per capta ncome, and Gn coeffcent from 1990 to 2000 as endogenous varables. The control varables reflect the fscal, socal, and economc factors that affect regonal growth and ncome nequalty. All these varables are from BEA-REIS, Census Bureau, and the Economc Research Servce (ERS) of USDA. Table 1 summarzes the descrptve statstcs of all the varables used n the study. Model Results and Analyss The estmated coeffcents of the smultaneous system of equatons and the statstcal propertes are gven n Table 2. Based on adjusted R 2 statstcs, the estmated model explans 23 percent, 82 percent, 51 percent and 66 percent of the varatons n ncome nequalty, populaton change, per capta ncome change, and employment change, respectvely. Model results are presented based on the three stated hypotheses. 9
Table 2. Emprcal Results for System of Equatons Model, US Countes (N=3038) Varable Endogenous Varables ΔP Equaton ΔE Equaton ΔPCI Equaton Δ GINI Equaton Coeffcent t-value Coeffcent t-value Coeffcent t-value Coeffcent t-value ΔP --- --- 0.5325 59.69-0.1787 2.21-4.25E-07-6.38 ΔE 2.028 3.51 --- --- 0.355 2.405 7.75E-07 6.04 ΔPCI -7.661-3.85 2.78 5.32 --- --- -6.85E-06-9.16 Δ GINI -167407.4-2.02 177875.5 3.92-36422 -4.11 --- --- Intal Condtons POP 90-0.155-4.06 6.02E-02 5-0.143-6.78-1.28E-07-5.01 EMP 90 0.505 9.03-0.232-9.16 9.029 0.32 3.56E-07 6.11 PCI 90 0.163 0.56 0.109 1.06 0.226 0.98-3.38E-07-1.4 GINI 90-41431.03-1.40 66387.43 3.82-12751.8-3.64-0.359-25.14 Fscal, Socal, and Economc Factors UNEMRT 90-254.27-1.71-8.44-0.11 --- --- 5.33E-04 2.98 PMINRTY 90 --- --- -25.33-1.40-2.388-0.57 2.22E-04 5.96 BACHDG 90 --- --- -114.62 1.33 87.115 6.20 1.18E-03 9.97 GPERCAP 92-2.209-3.33 1.107 2.96-0.396-5.77-4.64E-06-6.56 PCTAX 90-3.52-2.87 1.331 2.006-0.533-3.87-1.65E06-1.08 P65PLUS 90 241.39 1.26-253.27-2.87 38.89 1.98 1.29E-03 8.12 P25_34P 90 59.65 0.17 116.15 0.81 49.42 1.53-4.34E-05-0.13 NTMIG 90-0.969-0.393 --- --- --- --- --- --- PURBN 90-61.23-3.26 45.06 5.04-3.084-1.48-6.61E-05-3.15 SCPTL 90 3279.93 2.32 --- --- 487.31 4.91 --- --- MEDHVA 90 0.398 4.28-0.169-7.73 0.404 16.89 3.53E-07 9.21 PHVCNT 90-5.35.88-2.11 46.70 2.17-10.23-2.18-1.04E-04-2.04 PHSEAS 90 488.36 2.05 --- --- --- --- --- --- HWYDEN 90-10.246-9.11 4.88 6.98 0.431 2.62 --- --- ALLRDN 90 --- --- -0.108-1.30 4.99E-03 0.26 --- --- PTVLT 90 262.78 2.63-26.554-1.40 36.121 4.39 --- --- Constant 67100.77 3.06-49888.5-4.98 9762.818 5.34 0.201 20.25 adjr 2 0.818 0.655 0.513 0.22 F-Statstcs 594.92 275.69 146.47 53.02 Log-Lkelhood -36393.1567-33658.068-28605.383 6831.697 Note: All statstcal sgnfcance at the 0.10, 0.05, and 0.01 levels are bold. Model s estmated usng two-stage-leastsquares method. 10
Does Income Inequalty Negatvely Affect Growth? One central hypothess n ths study s whether ncome nequalty negatvely affects growth or not. The results from ths study provde the followng evdence: (1) when t comes to per capta ncome change, ncome nequalty change s sgnfcantly and negatvely related to ncome nequalty. Countes becomng more nequtable had lower ncome growth; (2) ncome nequalty s also negatvely and sgnfcantly related to populaton growth. Countes wth hgh ncome nequalty change have lower populaton change,.e., growngly more nequtable countes have lower populaton retenton; (3) ncome nequalty change s postvely related to employment change. Countes that are growngly ncome nequtable have more job growth. Therefore, we conclude that whle growng ncome nequalty lowers regonal growth performance through lower growth n ncome and populaton, that effect can be mtgated by employment growth. If the focus s purely the nequalty-ncome growth relatonshp, the results s conclusvely nverse. If the focus s the broader regonal growth as defned by populaton, ncome and employment growth, then the overall concluson s condtonal. If the populaton outmgraton and negatve ncome effects of growng ncome nequalty are more than the postve job growth effect, then overall regonal growth mpact of ncome nequalty s negatve. However, f the job growth effect s substantally hgher than the populaton and ncome declne effects, then the negatve effect on the overall regonal growth can be mtgated, and at tmes compensated. Therefore, our fndng demonstrates that the mpact of nequalty on growth could be dfferent across regons, and could also be nconclusve dependng on whch mpact domnates. 11
Is Income Inequalty Endogenous n Regonal Growth? Numerous studes tackled the mpact of ncome nequalty on growth, whle regardng ncome nequalty exogenous. Ths study modeled ncome nequalty wthn the regonal growth framework. Results suggest that ndeed ncome nequalty s endogenous to regonal adjustment process, and regonal growth n populaton, per capta ncome and employment have sgnfcant nfluences on the level of ncome nequalty. Results suggest (1) countes wth hgher populaton growth have lower change n ncome nequalty, that s places wth growng populaton have a declne n nequalty; (2) countes wth hgher per capta ncome growth have lower change n ncome nequalty, that s countes wth ncome growth have declnng nequalty; and (3) countes wth hgher employment growth have hgher ncome nequalty, that s countes wth growng job opportuntes also experenced a rse n nequalty. The fact that populaton, employment and ncome growth have sgnfcant relatonshp wth changes n ncome nequalty provded us the bass to argue that ncome nequalty s endogenous to regonal growth adjustments, and therefore regonal growth adjustment mpacts the nature and pace of ncome nequalty. Is Regonal Growth Adjustment the Channel through whch Income Inequalty Influences Growth Performance? Understandng the channels through whch ncome nequalty affects growth performance s crucal beyond the debate of whether any such relatonshp exsts n the frst place. Crosscountry studes have often focused on poltcal nstablty, savng rates among the rch and the poor, patterns of nvestment, government polces, etc as the possble explanatons for observed nequalty-growth relatonshps. Wthn a country, the fact that nsttutons, markets, poltcal 12
system, and savng behavor are lkely to be more homogeneous, such explanatons are not suffcent to explan observed relatonshps between ncome nequalty and growth wthn a country. We offer an alternatve explanaton. Results from ths study suggest that there s a smultaneous relatonshp between regonal growth n populaton, ncome and employment and changes n ncome nequalty. Income nequalty has a negatve relatonshp wth populaton and ncome growth (.e., hgh nequalty leads to out-mgraton and declnng ncomes) but a postve relatonshp wth job growth. On the other hand, change n ncome nequalty s negatvely related to growth n populaton and ncome, but postvely wth growth n employment. These sgnfcant and smultaneous relatonshps suggest that regonal growth adjustment have sgnfcant mplcatons to changes n ncome nequalty. Therefore, snce ncome nequalty s endogenous to regonal growth adjustment, the channel of relatonshp between growth and nequalty s establshed. The observed negatve relatonshp between nequalty and ncome growth can be explaned as follows: hgh ncome nequalty puts a downward pressure on populaton growth and ncome growth, whch n turn result n an ndrect negatve job growth mpact. Declnng populaton and ncome further exacerbates ncome nequalty, that then affect growth negatvely further. Ths process contnues untl, across regons, mgraton, ncome growth and job growth are equlbrated, whch determnes an equlbrum level of ncome nequalty. Any further dsequlbrum on growth or n ncome nequalty tself (for nstance, through government polcy) wll lead to new regonal growth and nequalty adjustment process that wll be equlbrated through mgraton and job creaton (nvestment) across regons. To demonstrate the drect and ndrect channels through whch nequalty and growth are related n a regonal growth framework, we provde four polcy factors as external shocks and 13
how the equlbratng process may occur: (1) educaton, (2) government expendture, (3) unemployment rate, and (4) mnorty populaton. Educaton: from the estmated results, educaton has a postve and sgnfcant drect effect on ncome nequalty. The result suggests that educaton can ncrease ncome nequalty. But educaton has a postve effect on per capta ncome change, and per capta ncome tself has a negatve relatonshp wth nequalty. Thus, educaton has an ndrect nequalty dampenng effect through ts effect on ncome. Therefore, the net effect of educaton on ncome nequalty depends on the magntude of the drect and ndrect effects. Educaton s thus one dsequlbratng factor through whch a drect and ndrect effect of nequalty can be observed and regonal growth adjustment through ncome change plays an equlbratng role. Government Expendture: based on the regresson results, government expendture has a drect ncome nequalty mtgatng effect. However, government expendture also has a negatve relatonshp wth populaton and per capta ncome change, and a postve relatonshp wth employment change, all of whch have an ncome nequalty ncreasng ndrect effects. Thus, the fnal effect of government expendture on ncome nequalty depends on the relatve strength of the drect mtgatng effect and the ndrect ncreasng effects. Once agan, regonal growth adjustment through populaton, ncome and employment changes play an equlbratng role. Unemployment Rate: the relatonshp between unemployment rate and ncome nequalty s postve,.e., a rse n unemployment exacerbates ncome nequalty. Thus, unemployment has a drect nequalty exacerbaton effect. Unemployment also has a sgnfcant and negatve relatonshp wth populaton change. A fall n populaton change has an ndrect effect of ncreasng ncome nequalty. Therefore, a rse n unemployment rate has a drect and ndrect effect of ncreasng ncome nequalty, partally equlbrated through mgraton adjustments. 14
Mnorty Populaton: the role of mmgrants and dversty on growth performance has been extensvely dscussed n the lterature. Evdence from ths study suggests that concentraton of mnortes has a drect ncome nequalty exacerbaton effect, but no sgnfcant ndrect effects. Snce most mmgrants and other mnortes have lower wages and occupy low payng jobs, larger concentraton may affect exstng ncome nequalty. Concluson Ths study focused on better understandng the lnks between ncome nequalty and economc growth n the U.S. and the channels through whch ncome nequalty may nfluence growth performance. Departng from much of earler works, the study (1) focuses on U.S. county level data to explan the nequalty-growth relatonshp wthn smlar legal, nsttutonal, and market condtons; (2) utlzes an augmented regonal growth model that relates ncome nequalty to patterns n ncome, employment and populaton growth, where the latter growth factors are also equlbratng forces between nequalty and growth; (3) endogenzes ncome nequalty wthn a regonal growth framework; and (4) followng a systems of equatons approach wth a two-stageleast-squares estmaton procedure, provdes robust estmates of the nequalty and growth relatonshp. The study tests three hypothess: (1) ncome nequalty negatvely mpacts regonal growth; (2) the channel through whch ncome nequalty nfluences growth performance s regonal adjustment n mgraton, job opportuntes and ncome growth; and (3) ncome nequalty s not exogenous, and hence s determned smultaneously wthn a regon growth adjustment process. Results from ths study confrm the frst hypothess, that ncome nequalty ndeed has a growth dampenng effect. Countes wth hgher nequalty have slower growth. Ths 15
fndng provdes addtonal credence to past studes that establshed an nverse relatonshp between ncome nequalty and growth. The study confrms that regonal growth adjustment has a drect and ndrect effect on ncome nequalty, and regonal growth adjustments could have an equlbratng effect on ncome nequalty across regons. Places that have hgh ncome nequalty, for nstance, would have growth lmtng outcomes, whch results to regonal mgraton, job growth and ncome growth adjustment effects. These forces n turn nfluence subsequent ncome nequalty, untl growth and nequalty are equlbrated through regonal growth adjustment. The study also confrms the thrd hypothess,.e., ncome nequalty s endogenous to regonal growth. The mplcaton of ths fndng s that to the extent that ncome nequalty s endogenously determned n regonal growth, patterns n regonal growth could be both determnants and equlbratng forces for the endogenously determned ncome nequalty. Fnally, by establshng that ncome nequalty has an nverse relatonshp wth growth and that ncome nequalty s endogenous to regonal growth factors whose adjustment equlbrate ncome nequalty across regons, and by establshng that regonal growth adjustment s the channel through whch ncome nequalty nfluences growth, ths study contrbuted to the lterature. Moreover, the study provdes addtonal polcy nsghts about ncome nequalty and how to manage t overtme. Ths study establshes drect and ndrect effects of dfferent polces on ncome nequalty. Effectve ncome nequalty management polces can beneft from closer understandng of: (1) the endogenety of ncome nequalty to regonal growth, and hence targetng effectve regonal growth can help nternally mtgate ncome nequalty; (2) tradtonal nequalty mtgatng polces, such as nvestment n educaton and overall government expendture on programs could have unntended ndrect effects, and the overall drect and 16
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