How Does Income Inequality Affect the Growth of U.S. Counties?

This paper aims to conduct a precise test of the political economy hypothesis linking income inequality and economic growth. By choosing covariates from a detailed county-level dataset and assuming that U.S. counties experience perfect capital mobility, I shut off the four possible channels linking inequality and growth other than political economy. This is a first in an empirical literature that has reported conflicting findings with observations of states and countries. I also present thematic maps to illustrate the cross-county variation in key growth determinants that is masked by state-level studies. My econometric tests find a negative association between the initial skewness of a county's income distribution and subsequent growth, as predicted by guiding theory: A one-unit increase in mean-to-median income ratio decreases growth from 1977 to 2000 by at least 5.6% and as much as 24.1%, depending on model specification. I also find evidence of county-level convergence.