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

We examine the Kuznets postulate that structural transformation leads to higher inequality using comparable panel data for a large number of developing and developed countries for 1960-2012. Countries show different paths of structural transformation, either being structurally underdeveloped, structurally developing, or structurally developed. In contrast to the Kuznets hypothesis, we find that the movement of workers to manufacturing unambiguously decreases income inequality, irrespective of the stage of structural transformation a particular country is in. We also find that, while the movement of workers into services has no discernible overall 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. 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. However, for the vast majority of low-income countries, where manufacturing-driven structural transformation seems a remote possibility, our findings suggest that inequality will increase with the movement of workers from agriculture to services