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Economic Development, Urban Underemployment, and Income Inequality

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James E. Rauch

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Abstract

The evolution of inequality in permanent income is investigated during the course of a less developed country's transformation from a primarily agricultural to a primarily urban-industrial economy. 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 the log variance measure of inequality in this country 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, and eventually falls after urbanization and consequently rural incomes has increased sufficiently to allow agents to make better than even bets in the industrial sector. These results in combination with new empirical evidence suggest that rather than being an unimportant artifact of the design of inequality indices, inverted-U behavior of inequality may be driven by the important social phenomenon of mass urban underemployment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3758.

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Date of creation: Jun 1991
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Publication status: published as Canadian Journal of Economics, vol. 26, pp. 901-918-(November 1993)
Handle: RePEc:nbr:nberwo:3758

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October. [Downloadable!] (restricted)
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  5. 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.
  6. Braulke, Michael, 1983. "A Note on Kuznets' U," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 135-39, February. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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.
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  1. 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. [Downloadable!]
  2. 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). [Downloadable!]
  3. Lewis Davis, 2007. "Explaining the Evidence on Inequality and Growth: Informality and Redistribution," Contributions to Macroeconomics, Berkeley Electronic Press, vol. 7(1), pages 1498-1498. [Downloadable!] (restricted)
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