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Economic Development, Urban Underemployment, and Income Inequality

  • James E. Rauch

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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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. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  2. 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.
  3. 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.
  4. 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.
  5. Braulke, Michael, 1983. "A Note on Kuznets' U," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 135-39, February.
  6. 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.
  7. Jonathan Eaton, 1987. "A Dynamic Specific-Factors Model of International Trade," NBER Working Papers 1479, National Bureau of Economic Research, Inc.
  8. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  9. 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.
  10. 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.
  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. 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.
  13. 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.
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