Inequality and Public Policy

Abstract

This paper examines the relationship between public policies and economic inequality. It shows that public policies have a significant and large effect on inequality. One influence is through redistribution, as fiscal policy affects the distribution of disposable income through progressive direct taxation and through social benefits. This effect is captured by a single comprehensive variable, which is public expenditures as percent of GDP. Public policy affects the distribution of market incomes as well, through public education, through hiring to the public sector, through building infrastructure and through labor market regulation.

Keywords: income distribution, Income inequality, public policy, redistribution

JEL Classification: C21, D31, D63