Development and income inequality: A new specification of the Kuznets hypothesis

Abstract

Substantial research has assessed the Kuznets hypothesis, which is a traditional relationship between inequality and development. The Kuznets hypothesis suggests that as development proceeds a country will experience first rising then falling income inequality. However, the existing literature analyzes the relationship between income inequality and per capita income, which is, at best, an incomplete measure of the multi-dimensional process of economic development. This paper explores the relationship between income inequality and development utilizing the more expansive, multidimensional Human Development Index (HDI) as the measure of development. Based on the “capabilities” approach to development, the Human Development Index incorporates key dimensions of human development that are particularly suitable for examination in the context of the Kuznets hypothesis. These include health and education measures as a complement to more traditional measures of living standards, such as per capita gross domestic product (GDP). In the Human Development Index, population health is measured using life expectancy at birth, while a measure of education is formed from a weighted average of the primary, secondary, and tertiary enrolment ratio and the adult literacy rate. The standard of living is captured by per capita GDP, and all three are incorporated into the overall human development index. Using data from 147 countries for the years 1992 through 2007, we analyze the relationship between income inequality, as measured by the Gini coefficient, and economic development, measured with the Human Development Index (HDI) and its constituent dimensional indices: the GDP index, the Life Expectancy Index and the Educational Index. Using both ordinary least squares with clustered standard errors and a fixed effects analysis, we find that the use of different measures of development significantly affects the shape of the Kuznets curve. Specifically, the results imply an S-curve in which, beginning at the earliest stages of a country’s development, growth in human development (as measured by the HDI) results in falling income inequality followed by a brief rise and then another fall in income inequality. To the best of our knowledge, this is a relationship not seen in the existing literature to date. In doing so, the results call into question the traditionally held view of the relationship between income inequality and human development. They also provide a basis on which the Kuznets hypothesis may be further examined in the future and suggest that rising inequality may not be a necessary part of the process of a country’s development.

Impact of Economic Affluence on CO2 Emissions in CEE Countries

“…Another part of the research was the estimation of models for an alternative approach to the EKC curve. Instead of the explanatory variable GDP, it was proposed to introduce the Human Development Index as the measure of economic affluence [78][79][80]. A mathematical formulation of the HDI is in the Human Development Report [15] (pp.…”

Is There a Link between Income Inequality and Economic Growth in the Balkans? Testing the Kuznets Hypothesis

“…Rarely do some studies use other variables for the income inequality than the Gini coefficient/ index. Such is the study of Huang et al (2012) who use the variables 'income shares of the top 10%, 5% and 1%' as proxies for income inequality, or the study of Theyson & Heller (2015) who use the Human Development Index. The Theil measure (how much individual country contributes to the global inequality) is also rarely used (Filauro, 2018).…”

“…However, equally large number of studies shows evidence against the Kuznets hypothesis (although to the best of our knowledge the literature is extremely limited for the Balkan countries again). Theyson and Heller (2015) examine a large sample of 147 countries for the 1992 -2007 period and find that the use of different measures of development significantly affects the shape of the Kuznets curve. They use the Human Development Index as a proxy for income inequality and the results imply an S-curve instead of an inverted U-curve, meaning that at the beginning of a country's development, income inequality is falling, followed by a brief rise and then another fall in income inequality.…”

The Relationship between Income Inequalities and Economic Growth: New Evidence

“…Kuznets's hypothesis assumes that income inequality is higher in less developed countries. He found that for countries that longer belong to the group of developed countries, in the early stages of industrialization, income inequality increases first, and later when the "balancing forces become strong enough", income inequality stabilizes and finally is reduced (Theyson and Heller, 2015). This relationship is shown in Figure 1.…”