Century-long dynamics and convergence of income inequality among the US states

Abstract

This paper analyzes convergence in income inequality among US states using century-long data from 1917 to 2012. Levels of inequality substantially differ among US states, and convergence analysis examines whether those differences have decreased over time. We show weak evidence of inequality convergence from 1917 to 2012. Convergence is found only in the 1932–1985 subsample. Subsample analysis shows divergence in the 1917–1931 and 1986–2012 subsamples, where we find different convergence clubs. Lack of convergence, or the existence of various convergence clubs, suggests that some US states approach different steady states in the long run. These convergence clubs are mainly determined by human capital and government policies. We find that redistributive policies and easy access to education reduce inequality; capital gains tax is also an efficient policy measure.