Investigating Income Inequality Dynamics in the United States

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. Little is known, however, 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 for states in the United 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 rates and bank deposits in 1920 have had a strong positive influence on the current level of inequality in the United States. Higher levels of farmland inequality in 1920 have also increased current incomes of the richer segment among the rich. Higher illiteracy is held to indicate a lower level of human capital, and that can affect income distribution. Higher levels of bank deposits and farmland inequality in the past indicated a higher inequality of wealth in the past. Through the intergenerational transmission of income and wealth, income distribution can become more skewed in the future, leading to yet higher levels of inequality.