Regional Convergence and National Inequality

Abstract

This paper explores the implications of regional income convergence for measures of inequality at the national level. In general, such convergence occurs as poorer regions overtake more developed ones. It is difficult to imagine any realistic scenario in which rising incomes in poorer regions would not have the effect of reducing absolute poverty. At the same time, it seems reasonable to assume that national inequality would fall as the mean incomes in the various regions converge. Given these general presumptions, the recent economic history of regional convergence between the southern United States and the rest of the nation is quite puzzling. Over the last twenty-five years mean family income in the southern United States has gone from about 80% of the national mean to about 93%. At the same time inequality in the South and that in the non-South have been changing only slightly when measured by Gini coefficients. Under these circumstances with no serious deterioration in intraregional measures of inequality, we would expect to observe a substantial reduction in national inequality as these two broad regions converge in mean incomes. Nevertheless, there has been no significant decline in the national Gini coefficient.' This apparent paradox is in contrast to an earlier period in U.S. history in which regional convergence occurred while national inequality was falling (Smolensky, 1961, 1963). The purpose of this paper is to demonstrate that the relationship between regional convergence and overall inequality is far from obvious. In particular, we shot that the convergence of mean incomes among regions, ceteris paribus, is not a sufficient condition for a reduction in common measures of ov erall inequality such as the Gini coefficient. The ceteris paribas conditions here are that the distribution of population across regions and the relative distribution of income within each region are held constant. The proof of this assertion is made in section II. In section III, we demonstrate the relevance of this analysis to the U.S. case. We show that the simple mean convergence of family incomes between the southern United States and the rest of the nation over the last twenty-five years should not have been expected to have a direct effect on national inequality. The naive link between regional income convergence and national income distribution does not hold up in this important case. Hence the arguments of section II are more than analytical curiosa. In a situation where the direct effects of income convergence are insufficient to reduce overall inequality there is the possibility that the broader process of regional convergence achieves this result more indirectly. Regional convergence may involve economic changes that work on intra-regional income distributions or the distribution of population across regions in ways favorable to greater national equality. In section IV we speculate on such indirect effects. From a theoretical point of view we conclude that the direction and extent of such interactions are not obvious.