Was Kuznets Right? New Evidence on the Relationship between Structural Transformation and Inequality

Kunal Sen | University of Manchester

We examine the Kuznets postulate that structural transformation leads to higher inequality using comparable time-series data for 29 developing and developed countries for 1960-2012.  Countries show different paths of structural transformation, being either structurally under-developed, structurally developing or structurally developed. In contrast to the Kuznets hypothesis, we find that the movement of workers to manufacturing unambiguously decreases net income inequality, irrespective of the stage of structural transformation that a particular country is in. We also find that while the movement of workers into services has no discernible impact on inequality across our set of countries, structural transformation relating to services increases inequality in structural developing countries and decreases inequality in structurally developed countries. The heterogeneity in the impact of services on inequality can be linked to the growth of the high productivity finance and business sector in the structurally developing and developing countries and its lack of presence in the structurally developing countries. Overall, our findings confirm the positive development effects that structural transformation relating to manufacturing may have in developing countries, not merely through higher growth but by reducing inequality as well.