Abstract: The United States witnessed two interesting distinctions. Labor union rates fell sharply in the 1980s while income inequality has been increasing since the 1980s. Understanding the underlying causes contributing to the marked increase in income inequality in U.S. is an important research and policy question. To analyze these phenomena, the paper employed state-level panel data on 48 states from 1988-2003 to estimate the impact of labor unions on U.S. states’ income inequality. The results from using various econometrics models suggested that U.S. states’ labor unionization rates defined as percent of employed workers covered by a collective bargaining agreement had negative and statistically significant effects on U.S. States’ income inequality measure. The findings indicated that increased labor unions played a significant role in making income distribution more equal.