Causality between Output and Income Inequality across U.S. States: Evidence from a Heterogeneous Mixed Panel Approach
DOI:
https://doi.org/10.25071/1874-6322.40331Abstract
In this paper, we investigate the causal relationship between output, proxied by personal income, and income inequality in a panel data of 48 states from 1929 to 2012. We employ the causality methodology proposed by Emirmahmutoglu and Kose (2011), as it incorporates possible slope heterogeneity and cross-sectional dependence in a multivariate panel. Evidence of bi-directional causal relationship exists for several inequality measures -- the Atkinson Index, Gini Coefficient, the Relative Mean Deviation, Theil’s entropy Index and Top 10% -- but no evidence of the causal relationship for the Top 1 % measure. Also, this paper finds state-specific causal relationships between personal income and inequality.References
Alesina, A., & Perotti, R. (1996). Income distribution, political instability, and investment. European Economic Review, 40(6), 1203-1228.
Alesina, A., & Rodrik, D. (1994). Distributive politics and economic growth. The Quarterly Journal of Economics, 109(2), 465-490.
Baltagi, B.H. (2008). Econometrics.4th Edition, Springer-Verlag Berlin Heidelberg.
Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of Economic Growth, 5(1), 5-32.
Berg, A., Ostry, J. D., & Zettelmeyer, J. (2012). What makes growth sustained?. Journal of Development Economics, 98(2), 149-166.
Birdsall, N., Ross, D., & Sabot, R. (1995). Inequality and growth reconsidered: lessons from East Asia. The World Bank Economic Review, 9(3), 477-508.
Bourguignon, F. (1981). Pareto superiority of unegalitarian equilibria in Stiglitz’ model of wealth distribution with convex saving function. Econometrica, 1469-1475.
Breitung, J. 2005. A parametic approach to the estimation of cointegration vectors in panel data. Econometric Reviews, 24:151-173.
Breusch, T.S., and Pagan, A. R. 1980. The Lagrange Multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1):239-253.
Clarke, G. R. (1995). More evidence on income distribution and growth. Journal of Development Economics, 47(2), 403-427.
Deininger, K., & Squire, L. (1996). A new data set measuring income inequality. The World Bank Economic Review, 10(3), 565-591.
Dew-Becker, I., & Gordon, R. J. (2005). Where did the productivity growth go? Inflation dynamics and the distribution of income (No. w11842). National Bureau of Economic Research.
Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of Economic Growth, 7(3), 195-225.
Dougherty, S. M. The Effect of Career and Technical Education on Human Capital Accumulation: Causal Evidence from Massachusetts.
Easterly, W. (2007). Inequality does cause underdevelopment: Insights from a new instrument. Journal of Development Economics, 84(2), 755-776.
Emirmahmutoglu, F. and N. Kose. 2011. Testing for Granger causality in heterogeneous mixed panels. Economic Modelling 28: 870-876.
Fisher, R. A. (1932). Statistical methods for research workers. Edinburgh: Oliver and Boyd, 1925. Fisher Statistical Methods for Research Workers.
Goldin, C., & Margo, R. A. (1992). The Great Compression: The Wage Structure in the United States at Mid-Century. The Quarterly Journal of Economics, 107(1), 1-34.
Gordon, R. J. (2009). Has the Rise in American Inequality Been Exaggerated?. Challenge, 52(3), 92-120.
Granger, C.W.J. 2003. Some aspects of causal relationships. Journal of Econometrics, 112:69-71.
Hassler, J., & Mora, J. V. R. (2000). Intelligence, social mobility, and growth. American Economic Review, 888-908.
Heinrich, C., & Smeeding, T. (2014). Building human capital and economic potential. Fast Focus, (21).
Kaldor, N. (1955). Alternative theories of distribution. The Review of Economic Studies, 83- 100.
Krugman, P., 2007. The Conscience of a Liberal. W.W. Norton & Company, New York, 124- 128.
Lazear, E. P., & Rosen, S. (1981). Rank-Order Tournaments as Optimum Labor Contracts. The Journal of Political Economy, 89(5), 841-864.
Leigh, A. (2007). How closely do top income shares track other measures of inequality?. The Economic Journal, 117(524), F619-F633.
Morrill, R. (2000). Geographic variation in change in income inequality among US states, 1970–1990. The Annals of Regional Science, 34(1), 109-130.
Parker, J. A., & Vissing-Jorgensen, A. (2009). Who bears aggregate fluctuations and how? (No. w14665). National Bureau of Economic Research.
Partridge, J. S., Partridge, M. D., & Rickman, D. S. (1998). State patterns in family income inequality. Contemporary Economic Policy, 16(3), 277-294.