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Oyvat, Cem (2015)
Publisher: University of Greenwich
Languages: English
Types: Other
Subjects: H1
This study takes a fresh look at how the structural changes within developing economies lead to an inverted U relationship between income per capita and income inequality. In lower income countries, economic growth raises income inequality because the gains of growth are restricted to a small group of households due to the urban-rural, formal-informal divides and existing skill gaps. In the latter phases of development, the labor markets become more homogenous; labor becomes mainly medium/higher-skilled and moves towards the urban formal sector. Thereafter, the benefits of economic growth spread to the wider population, and the income Gini coefficient declines. This paper first theoretically discusses how these changes are mediated by a) urbanization; b) changes in the level of informality; and c) changes in education inequality.\ud \ud The paper then tests the validity of the Kuznets hypothesis using panel data techniques and a cross-country dataset. The results show that an inverted U relationship between income per capita and income inequality only exists in the developing economies. The empirical findings also support the claim that income per capita affects income inequality through sectoral shares and informal employment. However, the evidence is weaker on income per capita's influence through education inequality.
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    • 1In 2011, American Economic Review named Kuznets (1955)'s \Economic Growth and Inequality" as one of the top 20 articles published in AER during its rst 100 years.
    • 4The HDI values calculated for this study are 0.457, 0.446 and 0.435 for 2010's Mauritania, Nepal and Uganda respectively, whereas Korea's HDI score in 1960 is 0.423.
    • 5The average changes for the 1960s and 1970s are not reported, as for 1965 only New Zealand was classi ed as a developed economy, and for 1975, only 5 countries were classi ed as developed.
    • 6The education Gini coe cient in the UK remained approximately 0.24 between 1985-2010. Similarly, Australia's education Gini coe cient declined from 0.13 to 0.12 between 1980-2010, and the education Gini coe cient in the US increased slightly from 0.10 to 0.11 between 2000-2010.
    • 9The empirical work for di erent countries (e.g. Agesa, 2000; Tunal , 1996; Bowles, 1970; Fields, 1982; Schultz, 1982) has also found that the average urban and rural incomes signi cantly a ect the migration between the rural and urban sectors. 1980s 1990s 2000s
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