Via Economic Logic, there’s new research on the Kuznets Curve. As originally formulated, the idea is that income inequality in a society grows as economies initially transition from agricultural to industrial societies, but falls later as they develop further.
But what about when societies transform from industrial to post-industrial societies based on service-sector employment? Jordi Guilera examines the issue and argues that inequality tends to rise again as societies continue developing. The Kuznets Curve, in other words, is really “N”-shaped.
Guilera finds that the manner in which inequality shifts is consistent with this story. When inequality initially rises, it is due to greater inequalities between sectors of the economy. One way of thinking about this is through Dani Rodrik’s graph:
In other words — industry is an enormous lever of growth for poor countries. Seemingly automatically, industrial productivity will rise over time and generate rising incomes. In the short-run, this will generate inequality as the industrial sector is dramatically more productive than other sectors of the economy. But in the longer-run, the economy overall has higher productivity and then lower inequality.
When inequality rises again after a country has already industrialized, it is due to a different set of pressures — greater inequalities within sectors of the economy. The pressure here comes from differential access to skills. Another graph Dani Rodrik presents illustrates this issue:
Here, you see that while labor productivity grew dramatically in the US over 1980-2009; real compensation (including fringe benefits) was stagnant for those with a high school degree only (and presumably even worse for those without a high school degree). Yet there was an enormous growth in compensation for those with higher education. Modern service economies prize above all else the ability to accumulate and capitalize on human capital skills regardless of sector. And this results in growing inequality.
I suppose the question is whether this second spike in inequality will ever run into reasons to go down again due to changing labor force composition. Presumably, if we did a better job of spreading skills throughout the population, inequality would fall again. But there appear to be durable problems in making that happen.