Convergence in Income Inequality: Further Evidence from the Club Clustering Methodology across States in the U.S

This paper contributes to the sparse literature on inequality convergence by empirically testing convergence across states in the U.S. This sample period encompasses a series of different periods that the existing literature discusses--the Great Depression (1929-1944), the Great Compression (1945-1979), the Great Divergence (1980-present), the Great Moderation (1982-2007), and the Great Recession (2007-2009). This paper implements the relatively new method of panel convergence testing, recommended by Phillips and Sul (2007). This method examines the club convergence hypothesis, which argues that certain countries, states, sectors, or regions belong to a club that moves from disequilibrium positions to their club-specific steady-state positions. We find strong support for convergence through the late 1970s and early 1980s, and then evidence of divergence. The divergence, however, moves the dispersion of inequality measures across states only a fraction of the way back to their levels in the early part of the twentieth century. Keywords Club convergence * Inequality measures * Panel data * U.S. JEL Classification C22 * D63
Introduction Dew-Becker and Gordon (2005) show that from 1966 to 2001, only the top 10% of the income distribution in the U.S. gained real income equal to the growth in [...]