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Through utilizing US state-level data at annual frequency from 1976 to 2008, this paper documents
a causal effect of infrastructure investments, specifically public spending on highways,
on income inequality. The number of seats in the US House of Representatives Committee On
Appropriations serves as a valid instrument to identify quasi-random variations in state-level
spending on highways. When a given state gains an additional committee member, which is
rather exogenous, new federal grants are allocated to that state, resulting in the state government
slashing its investment expenditures on highways. In other words, a crowding-out effect
of federal funding for state investment in highways is at play. The main contribution of this
paper is to show that such committee-driven cuts in spending on highways cause an increase
in income inequality within a two-year horizon. In addition, we show that wages paid for construction
jobs correlate positively and strongly with spending on highways at the state level.
This further provides suggestive evidence that the construction sector plays an important role
in the transmission channel from a rise in state spending on highways to a reduction in income
inequality.
