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Poverty, Income Inequality and Economic Growth in U.S. Counties: - page 2 / 33

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1. Introduction

The link between poverty, inequality and economic growth has been an ongoing

issue in development economics and the related evidence has been quite controversial.

Most studies concur on the view that economic growth reduces absolute level of poverty

depending on the economy’s income distribution (Goudie and Ladd 1999). At the same

time, many studies present evidence that income inequality is harmful for economic

growth (Aghion et al. 1999, Alesina and Rodrick 1994, Deininger and Squire 1998,

Persson and Tabellini 1994) and a few others document contrary evidence (Li and Zhou

1998, Partridge 1997). Barro (1999), on the other hand, provides evidence for a negative

relationship between growth and income inequality in poor countries and a positive

relationship in rich countries.

Reducing poverty and income inequality, and increasing economic growth are

goals that governments at large pursue in some form or the other. Therefore, whether

there is a trade-off among these issues is indeed an important policy question. I seek to

answer this question in this paper by investigating how poverty, inequality and economic

growth are related in the U.S. counties. Specifically, I investigate a) whether counties

with lower level of poverty and income inequality in 1979 experienced higher economic

growth between 1979 and 1999 than others, and b) whether counties that experienced

higher economic growth between 1979 and 1999 had lower levels of poverty and income

inequality, compared to other counties.

I use both inequality and poverty for a few reasons. First, studying the dispersion

of income as well as the lower end of the distribution gives a complete picture of how

much the poor can benefit from economic growth. Second, the theoretical links between

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