Kuznets Revisited: What Do We Know about the Relationship between Structural Transformation and Inequality?

Abstract

This paper revisits the Kuznets postulate that structural transformation will be associated with increasing inequality using comparable time series data for 32 developing and recently developed economies for the post-1950 period. We find that structural transformation in the majority of our economies has resulted in the movement of workers from agriculture to services, and not to manufacturing. Economies show different paths of structural transformation that cut across geographical regions, being either structurally underdeveloped, structurally developing, or structurally developed. We see clear differences in the structural transformation–inequality relationship depending on the stage of structural transformation that a particular economy is in, as well as across regions. We do not see a Kuznets-type relationship between manufacturing employment share and inequality when we take into account the different paths of industrialization that economies in our dataset have followed. On the other hand, inequality unambiguously increases with structural transformation if the movement of workers from agriculture is to services.