"Essays on Income Inequality and Structural Transformation"

Zhu, Zhe, Economics - Graduate School of Arts and Sciences, University of Virginia
Young, Eric, Department of Economics, University of Virginia
Mukoyama, Toshihiko, Department of Economics, University of Virginia
Osotimehin, Adesewa, Department of Economics, University of Virginia

This dissertation consists of three chapters. In the first chapter, "Accounting for the Kuznets Curve through Structural Change", I show a positive co-movement between the employment share of manufacturing sector and the Gini coefficient for income. In seven out of ten countries that have reliable long-term data, these two variables rise and fall together. I develop a model with heterogeneous agents in which demand-driven sectoral labor reallocation occurs alongside the evolution of inequality. When the industrialization process starts, the rising price of manufacturing goods relative to agricultural goods leads to an increase in the relative wage for manufacturing workers. Because labor is not freely mobile across sectors, income inequality increases due to a shortage of qualified labor in the high-wage manufacturing sector. After enough individuals acquire the skills to work in manufacturing and services, the relative wages in these sectors fall, reducing inequality. By adding a service sector to Kuznets' conjecture and calibrating to Brazil from 1962 to 2010, this model produces a decline in manufacturing employment share, consistent with recent empirical findings in literature of structural change. A counterfactual analysis with reduced labor market friction generate a 20.7% decrease in income Gini coefficient from the benchmark calibration.

The second chapter, titled "Sectoral Tariffs and Structural Transformation", examines the treatment effect of tariff reduction on domestic structural transformation. I compiled a dataset that contains sectoral tariffs and sectoral employment shares of 41 countries and regions. Then I evaluate the effect of tariffs by a difference-in-differences estimation. The main finding is that for developing countries, liberalization has a positive effect on labor reallocation from agriculture to industry. Lower tariff in agricultural products will move workers out of the agricultural sector, whereas lower tariff in industrial products will attract more workers to enter industry sector. This is contrary to the conclusion of O'Rourke (2000), where he analyzes the experience of 10 advanced economies during the industrial revolution era and finds that tariff is growth-stimulating.

In the third chapter-"Decomposing Income Inequality: The Case Study of Latin America", I perform a one-dimensional decomposition of Latin American Inequality using disaggregated employment and wage data. Latin America has been regarded as the most representative example of the Kuznets Curve type of development. In the past few decades, Latin America experienced a hump shape in income inequality. The rising part of inequality fits perfectly into Kuznets' original dual-sector economy theory, where wage inequality is the main driver of the change in income distribution. However, the reason for the decline of Gini coefficient remains unclear. In this chapter, I focus on the decline of Gini coefficients in Latin American countries starting around 2000. By decomposing the evolution of income inequality and separately identifying the contribution from each determining factor, I find that the original Kuznets Curve theory is one of the main contributor of the declining episode of inequality, but not always the most significant contributor. In addition, sectoral wage differences does not always follow Kuznets' hypothetical movement. In some countries, the catch-up effect of agricultural wages is the most important driver of earnings equalization.

PHD (Doctor of Philosophy)
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