Effects of Government Policies on Urban and Rural Income Inequality

We use three conventional inequality indices—the Gini, the coefficient of variation of income, and the relative mean deviation of income—and the Atkinson index to examine the effect of income tax rates, the minimum wage, and all the major government welfare and transfer programs on the evolution of income inequality for rural and urban areas by state from 1981 to 1997. We find that these programs have qualitatively similar but quantitatively different effects on urban and rural areas. Most importantly, taxes are more effective in redistributing income in urban than in rural areas, while welfare and other government transfer programs play a larger role in rural areas.