Working Papers

Government Policy Effects on Urban and Rural Income Inequality


Do taxes, minimum wage laws, social insurance policies, and transfer programs affect rural and urban income distributions differently? Is income distributed less equally in urban than in rural areas? Are rural and urban income distributions evolving similarly? Asking these questions may appear pointless if the answers vary with the measure of equity used. However, we find that the Gini and the other well-known inequality or welfare measures give the same qualitative answers to these questions.

Using data from 1981 to 1997, we show that these government policies have qualitative similar but quantitatively different effects on rural and urban areas; marginal income tax rates and the Earned Income Tax Credit play a more important role in equalizing income than do the other government programs in both areas; and income inequality measures for rural and urban areas have recently diverged.

We examine the effects of eight major government policies on welfare using the Atkinson welfare index as well three traditional welfare measures: the Gini index, coefficient of variation of income, and the relative mean deviation of income. In addition to examining the effect on welfare of government policy variables, we determine how changes in macro conditions and demographic variables over time and across the states affect welfare.