Inequality, relative income and newborn health

Income inequality has been on the rise in most industrialized nations since the 1970s. There has been considerable discussion of the causes of the rise in income inequality. Less has been written about its consequences. A major concern over rising inequality is its potential to reduce intergenerational mobility, leading to even greater inequality in the next generation. We estimate the impact of rising inequality over the period 1970-2010 on offspring health at birth, a measure of human capital that has been shown to be highly correlated with future education, IQ and income. Our data comes from Vital Statistics birth records, Census data, and the Bureau of Labor Statistics. We define inequality both at the aggregate level and at the individual level: as a group-level measure (the Gini coefficient for each state or county), and as individual level measures of relative income (relative deprivation, rank, and relative income distance). We document a strong negative relationship between the Gini and newborn health in cross sectional analysis, but find that including a modest set of controls, or limiting variation to changes in inequality over time within an area, or instrumenting for inequality eliminates the relationship between the Gini and newborn health completely. However, this null result likely reflects heterogeneity in the effect of rising inequality. When we estimate the impact of relative income on newborn health, we find negative and significant effects of having relatively less income than one’s neighbors on birth weight, even after controlling for area fixed effects and instrumenting for differences in the income distribution. Moreover, these effects are not linear or symmetric: those at the bottom of the distribution suffer more from a decline in relative position than those closer to the top. The latter is consistent with the strongly non-linear relationship between income and newborn health. For our analyses we use ordinary least square, fixed effects estimation, and instrumental variables estimation.