Taking Kuznets seriously

Abstract

Numerous studies have tested Kuznets’ hypothesis of a hump-shaped relationship between inequality and industrialization by regressing the Gini coefficient on the level and square of per capita income. Here, we examine Kuznets’ original idea that inequality first increases and then declines when workers move from agriculture to manufacturing. We collect sectoral wage and employment data for 17 advanced countries over the period 1800-2020 and compute the ‘Kuznets Gini’ as the Gini coefficient that results from changes in sectoral employment shares and the sectoral wage differential. We show the hump-shaped path of the Kuznets Gini and establish, in panel regressions, that inequality arising from sectoral migration has been an important determinant of overall income inequality.