The Effects of Earnings Inequality on State Social Spending in the United States

Abstract

States provide a variety of goods and services to their citizens, ranging from police protection to highway construction to education and health services. This study is concerned with how earnings inequality has affected such spending at the state level in the United States between 1977 and 2005. The results show that for every 1 percent increase in the 9050 percentile ratio of earnings, social spending on non-health and non-education goods and services increases by approximately 0.231 percent, or about $615 per person. A similar 1 percent increase in the 5010 percentile ratio of earnings is associated with a smaller 0.042 percent rise in spending, or $112 per person. A one percent increase in overall inequality, as measured by the Gini coefficient, is associated with a rise in social spending of about 0.255 percent, or $680 per person. The model is robust to a variety of sensitivity tests and generally shows that increases in inequality in both the upper- and lower-tail of the earnings distribution serve to increase social spending.