States with Better ‘Business Climates’ Also Have Higher Inequality

States with Better ‘Business Climates’ Also Have Higher Inequality

President Obama speaks on income 'inequality' on Dec. 4. (Evan Vucci/AP)
President Obama speaks on income ‘inequality’ on Dec. 4. (Evan Vucci/AP)

(CityLab) – Economic inequality has risen substantially in the United States over the past several decades, but its rise has been uneven across the 50 states. According to my own analysis here on CityLab, more than half of states—26, plus Washington, D.C.—saw inequality increase at a higher rate than the national average between 1979 and 2012.

Inequality has mainly been tied to big economic shifts like globalization, technology, and rising returns to capital. Some commentators have also highlighted the role of national policies like changes in the income tax or the rate of taxation on capital gains. But what if changes in policy at lower levels of government have contributed to the rise in income inequality as well?

A new study by economists David Neumark and Jennifer Muz of the University of California, Irvine examines the effects of state policies meant to promote better business climates on inequality. It looks at two types of business climate policies: policies that seek to spur growth by lowering business costs and those that seek to do so by improving quality of life. They examine the effects of these two policy strategies by using widely cited “business climate” indexes developed by organizations such as the Cost of Doing Business Index, the State Business Tax Climate Index, and the U.S. Economic Freedom Index, which proxy for cost reduction strategies, and “quality of life” indexes like the State Competitiveness Index, the State New Economy Index and Development Report Card for the States.

READ MORE