Regulation and income inequality in the United States

Abstract

Income inequality in the United States has risen over the past several decades. Over the same period, federal regulatory restrictions have increased. An emerging literature shows that regulations can have regressive effects on the distribution of income, exacerbating inequality. The Federal Regulation and State Enterprise (FRASE) index quantifies the regulatory restrictions that apply to each US state by industrial composition. We construct a panel of 50 US states from 1997 to 2015 to test whether states exposed to more federal regulatory restrictions have higher levels of income inequality. The results indicate that a 10 percent increase in federal regulation is associated with an approximate 0.5 percent increase in income inequality as measured by the Gini coefficient . When states are rank-ordered by average Gini coefficient, a 0.5 percent increase in income inequality will typically result in a two-position decline in state ranking. • Both income inequality and federal regulations have increased in the United States. • We study these variables in a panel of 50 states between 1997 and 2015. • States are differentially exposed to federal regulation by industrial composition. • States exposed to more federal regulation tend to have higher income inequality. • Regressive effects may occur because of capture by incumbents and/or higher costs.