Income Distribution, Welfare, and Economic Growth: Evidence towards Social Investment in American States

Ae-Sook Kim, Indiana University - Purdue University Fort Wayne

Abstract

Efficiency and equity are key values in democratic societies. The relationship between economic growth and redistribution has been theorized and empirically tested in many studies (Burtless 2003; Ashby and Sobel 2007; Frank 2009). However, scholars provide conflicting theoretical expectations and empirical evidence reported is inconsistent. The impact of economic growth on income distribution does not seem to be unidirectional. Doucouliagos & Ulubasoglu (2008) argue that the relationship is contingent upon social, cultural, and demographic institutions. This study seeks to disentangle the relationships among income distribution, welfare, and economic growth using the case of the U.S. States. The United States have experienced economic growth and higher income inequality over a couple of decades. Does this indicate that efficiency sacrifices equity (Okun 1975)? This study finds a positive impact of the welfare state on income distribution and also finds that an equal income distribution leads to higher economic growth rates. It supports the social investment theory; an investment on productive welfare programs promotes economic growth (Midgley 1999).