Is Income Inequality Endogenous In Regional Growth?

Abstract

This study focuses on testing the relationship between income inequality and economic growth within counties in the United States, and the channels through which the effects of a relationship are observed. Based on a system of equations estimation, the empirical results confirm the hypotheses that income inequality has a growth-dampening effect, that income inequality is endogenous to regional growth, and that the channels through which income inequality determines growth are adjustments at the regional level, such as migration and changes in employment and incomes. The results have numerous policy implications. The noted forces can be utilized as policy instruments to mitigate income inequality and its growth dampening effects, because a) as income inequality is endogenous, its equilibrium level can be internally determined within a regional growth process, b) since traditional income inequality mitigating policies have an indirect effect on overall regional growth, they may have unintended indirect effects on income inequality, and c) regional growth adjustment also equilibrates income inequality.