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Economic Development, Urban Underemployment, and Income Inequality

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  • James E. Rauch

Abstract

The evolution of income inequality during the course of economic development is investigated. The source of inequality is market luck in obtaining employment in the protected urban 'formal sector'versus employment in the unprotected urban 'informal sector.' It is shown that with development, inequality tends to follow an 'inverted U.'It rises when urbanization is low and consequent pressure on the land keeps rural incomes low, making agents willing to incur high risks of 'underemployment'in the urban informal sector. It eventually falls after urbanization and consequently rural incomes have increased sufficiently to allow agents to make better than even bets in the urban-industrial sector.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 26 (1993)
Issue (Month): 4 (November)
Pages: 901-18

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Handle: RePEc:cje:issued:v:26:y:1993:i:4:p:901-18

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  1. Robinson, Sherman, 1976. "A Note on the U Hypothesis Relating Income Inequality and Economic Development," American Economic Review, American Economic Association, vol. 66(3), pages 437-40, June.
  2. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  3. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  4. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc.
  5. Papanek, Gustav F. & Kyn, Oldrich, 1986. "The effect on income distribution of development, the growth rate and economic strategy," Journal of Development Economics, Elsevier, vol. 23(1), pages 55-65, September.
  6. Moore, Robert E., 1990. "Measuring inequality change in an economy with income growth : Reassessment," Journal of Development Economics, Elsevier, vol. 32(1), pages 205-210, January.
  7. Braulke, Michael, 1983. "A Note on Kuznets' U," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 135-39, February.
  8. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  9. Tidrick, Gene M, 1975. " Wage Spillover and Unemployment in a Wage-Gap Economy: The Jamaican Case," Economic Development and Cultural Change, University of Chicago Press, vol. 23(2), pages 306-24, January.
  10. Knight, J B, 1976. "Explaining Income Distribution in Less Developed Countries: A Framework and an Agenda," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 38(3), pages 161-77, August.
  11. Fields, Gary S, 1979. "A Welfare Economic Approach to Growth and Distribution in the Dual Economy," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 325-53, August.
  12. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  13. Banerjee, Biswajit, 1983. "The Role of the Informal Sector in the Migration Process: A Test of Probabilistic Migration Models and Labour Market Segmentation for India," Oxford Economic Papers, Oxford University Press, vol. 35(3), pages 399-422, November.
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Citations

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Cited by:
  1. Cem Oyvat, 2013. "Agrarian Structures, Urbanization and Inequality," Working Papers wp336, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Titas Kumar Bandopadhyay, 2007. "Trade Reform, Capital Mobility, and Efficiency Wage in a Harris-Todaro Economy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(2), pages 163-174.
  3. David Castells & Vicente Royuela, 2012. "Agglomeration, Inequality and Economic Growth: Cross-section and panel data analysis," ERSA conference papers ersa12p492, European Regional Science Association.
  4. Vincenzo Lombardo, 2012. "Modern foundations of dual economy models," Discussion Papers 8_2012, CRISEI, University of Naples "Parthenope", Italy.
  5. Larramona, Gemma & Sanso, Marcos, 2006. "Migration dynamics, growth and convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2261-2279, November.
  6. Valerie R. Bencivenga & Bruce D. Smith, 1995. "Unemployment, migration, and growth," Working Papers 561, Federal Reserve Bank of Minneapolis.
  7. Elgin, Ceyhun & Oyvat, Cem, 2013. "Lurking in the cities: Urbanization and the informal economy," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 36-47.
  8. David Castells-Quintana & Vicente Royuela, 2014. "Agglomeration, inequality and economic growth," The Annals of Regional Science, Springer, vol. 52(2), pages 343-366, March.
  9. Glomm, Gerhard & Ravikumar, B., 1998. "Increasing returns, human capital, and the Kuznets curve," Journal of Development Economics, Elsevier, vol. 55(2), pages 353-367, April.
  10. M. Ali Khan, 2007. "The Harris-Todaro Hypothesis," PIDE-Working Papers 2007:16, Pakistan Institute of Development Economics.
  11. Ceyhun Elgin & Oguz Oztunali, 2013. "Environmental Kuznets Curve for the Informal Sector of Turkey (1950-2009)," Working Papers 2013/05, Bogazici University, Department of Economics.
  12. Maarek, Paul, 2012. "Labor share, informal sector and development," MPRA Paper 38756, University Library of Munich, Germany.
  13. Jonathan Temple, 2002. "Wage Inequality in a Dual Economy," Bristol Economics Discussion Papers 02/531, Department of Economics, University of Bristol, UK.
  14. Lewis S. Davis, 2004. "Explaining the Evidence on Inequality and Growth: Informality and Redistribution," DEGIT Conference Papers c009_032, DEGIT, Dynamics, Economic Growth, and International Trade.
  15. Frazer, Garth, 2006. "Inequality and development across and within countries," World Development, Elsevier, vol. 34(9), pages 1459-1481, September.
  16. Donald S. Allen & Leonce Ndikumana, 1999. "Income inequality and minimum consumption: implications for growth," Working Papers 1999-013, Federal Reserve Bank of St. Louis.
  17. Lall, Somik V. & Selod, Harris & Shalizi, Zmarak, 2006. "Rural-urban migration in developing countries : a survey of theoretical predictions and empirical findings," Policy Research Working Paper Series 3915, The World Bank.
  18. Nicole Madariaga & Sylvie Montout & Patrice Ollivaud, 2004. "Regional convergence, trade liberalization and agglomeration of activities : an analysis of NAFTA and MERCOSUR cases," Cahiers de la Maison des Sciences Economiques bla04069, Université Panthéon-Sorbonne (Paris 1).
  19. Joël Hellier & Stéphane Lambrecht, 2012. "Inequality, growth and welfare: The main links," Working Papers 258, ECINEQ, Society for the Study of Economic Inequality.
  20. Fields, Gary S., 2005. "A welfare economic analysis of labor market policies in the Harris-Todaro model," Journal of Development Economics, Elsevier, vol. 76(1), pages 127-146, February.

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