Determinants of cross-country income inequality : an augmented Kuznets hypothesis

Why does income inequality differ among countries? Using a sample of 80 countries from the 1980s, the author shows that two types of factors explain variations in income inequality. The first are factors that are, in the short term, independent of economic policies and are included in the standard formulation of the Kuznets'curve: the level of per capita income and the country's regional heterogeneity. From the viewpoint of economic policy, these are"given"factors, resulting in a"given inequality."The second group of factors are the social-choice factors reflected in the sizeof social transfers and of state sector employment, both of which reduce inequality. For this sample, the reduction amounts to about a quarter of"given"inequality. The importance of social-choice factors rises as the level of income rises. The divergence between actual inequality and the inequality predicted by the standard Kuznets'curve therefore systematically widens as a society develops. This discrepancy is systematic, the author contends. Inequality in richer societies decreases not only because of economic factors but also because societies choose less inequalities as they grow richer.