A direct test of Kuznets in a developing economy: a cross-district analysis of structural transformation and inequality in Indonesia

Abstract

This paper empirically tests the Kuznets hypothesis that structural transformation–the movement of labour from low productivity to higher productivity sectors–is associated with rising inequality in a developing economy. We assemble a unique data set of inequality and sectoral employment shares of almost 300 districts of Indonesia and sector-specific measures of inequality for the period 1992–2017. Unlike studies that use value added shares to test the Kuznets hypothesis, this paper is among a few that directly test it with sectoral employment shares. We find that structural change and rising inequality coevolve in different ways depending on the modality of structural transformation. Specifically, we find in the Indonesian case that structural transformation has a tendency to be associated with falling inequality during a period of industrialization and increasing inequality during a period of tertiarization.