Does income inequality dampen growth effect on poverty? evidence from the US county data

This paper estimates the dampening effect of rising inequality on growth effects on poverty rates using the U.S. county level data. According to the “growth elasticity” argument, rising inequality weakens the magnitudes of the growth effects on poverty reduction. The dampening effect is defined as the negative effect of rising inequality on the growth elasticity of poverty and is decomposed into the direct and the indirect dampening effects. Where the direct dampening effect is equal to the estimate of inequality elasticity of poverty. The indirect dampening effect is calculated as the difference between the estimate of a benchmark growth elasticity of poverty and the estimate of growth elasticity of poverty while allowing inequality to change. The benchmark growth elasticity of poverty is estimated from a model which assumes inequality as constant. This study analyzes data on poverty rates, real median household income and inequality from 731 counties of the United States. Data are compiled from two programs of the U.S. Census Bureau and converted into annualized percent changes. Unlike previous studies analyzing survey data from developing countries, U.S. county data are comparable across counties and more reliable. The dampening effects are estimated using the ordinary least square technique applied to five models of poverty. The study finds that income growth does alleviate poverty, but growing inequality directly and indirectly dampens the growth effects on poverty rates. Estimate of the total dampening effect of inequality indicates that the rising inequality is likely to lift 129,405 fewer people out of poverty annually. The growth effect on poverty rates is estimated to be weaker in counties with growing inequality than that in counties with declining and unchanged inequality, confirming the dampening effect of rising inequality. Estimates of the regional effects captured by regional dummy variables suggest that regional specific factors do also dampen growth effect on poverty rates. One reason for such dampening is likely to be tightened-budgetary conditions emanating from cuts in social safety net programs across the United States during 2006-10. Overall, the results from this study indicate that merely pro-growth policies are unlikely to ensure faster poverty reduction in the United States. The policy intervention must also focus on pro-poor growth strategies targeting the incomes of the lower quintiles.