Kuznets inverted-U hypothesis revisited: a time-series approach using US data

Abstract

Kuznets' inverted-U hypothesis implies that economic growth worsens income inequality first and improves it later at a higher stage of economic development. In addition to economic growth, other factors such as population growth, resource endowment, price instability, openness, currency devaluation, etc. have been identified as determinants of income inequality. Previous research used cross-sectional data to test not only the Kuznets' hypothesis, but also empirical validity of other factors and provided mixed conclusions. In this article we use time-series data from the US and recent advances in time-series modelling to show that economic growth worsens income inequality in the short-run and improves it in the long-run.

Notes

¹For a theoretical exposition, see Vicente and Borge (2000) and for review of the articles, see Bahmani-Oskooee et al. (2004).

²Similar arguments have also been advanced by Edwards (1986).

³Note that the GINI data come from Deininger and Squire (1996), ‘Measuring income inequality: a new database’. Available at www.worldbank.org/research/growth/dddeisqu.htm & World Development Report (The World Bank, Washington, DC). Real income, population & nominal effective exchange rate data come from International Monetary Fund, International Financial Statistics on CD-ROM (The IMF, Washington, DC).

⁴The critical value comes from Pesaran et al. (2001, p. 300, Table CI, Case III).