Investigating Income Inequality in the United States

Abstract

Recently, income inequality has been rising in many parts of the world. This is creating some serious concerns among policymakers, as higher levels of income inequality can lead to various social ills. However, little is known about the role of historical factors in explaining the current level of inequality. I use the model of Durlauf (1996) as reference to create an econometric model to estimate this impact. I use current and historical data of US states to study the effect of different socio-economic factors on inequality. Using two measures of income inequality, one that places equal weight on all individuals, and one that places a higher weight on the richer group, I find that illiteracy rate in 1920 and bank deposits in 1920 have a strong positive influence on current level of inequality. Higher levels of farmland inequality in 1920 also increase current incomes of the richer segment among the rich. Higher illiteracy indicates a lower level of human capital, and that can affect income distribution. Higher levels of bank deposits and farmland inequality in the past indicate a higher inequality of wealth in the past. Through the intergenerational transmission of income and wealth, income distribution can be more skewed in the future, leading to higher levels of inequality.