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 are in different stages of structural transformation, being either 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 that a particular country is in. We also find that the movement of workers into services has a positive impact on inequality across our set of countries at an early stage of structural transformation and a negative effect at a later stage, suggesting that the Kuznets postulate may apply more for services-driven structural transformation than manufacturing-driven structural transformation. 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 many low-income countries, where the realistic possibility of structural transformation may be the movement of workers from agriculture to services, our findings suggest that inequality may increase with further structural transformation.

This paper revisits the Kuznets postulate that structural transformation will be associated with increasing inequality using comparable time series data for 32 developing and recently developed economies for the post-1950 period. We find that structural transformation in the majority of our economies has resulted in the movement of workers from agriculture to services, and not to manufacturing. Economies show different paths of structural transformation that cut across geographical regions, being either structurally underdeveloped, structurally developing, or structurally developed. We see clear differences in the structural transformation–inequality relationship depending on the stage of structural transformation that a particular economy is in, as well as across regions. We do not see a Kuznets-type relationship between manufacturing employment share and inequality when we take into account the different paths of industrialization that economies in our dataset have followed. On the other hand, inequality unambiguously increases with structural transformation if the movement of workers from agriculture is to services.

This study has been prepared within the UNU-WIDER project Varieties of structural transformation.

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