Income distribution and growth: The Kuznets hypothesis revisited

This study develops a general equilibrium model in which the evolution of income inequality and output conforms with the Kuznets hypothesis. The paper presents a novel endogenous mechanism that generates the inverted-U relation between income inequality and per capita output, and captures the reciprocal influence between the two. Unlike previous attempts for a comprehensive theoretical modelling of this phenomenon, the evolution of the economy is consistent with another important empirical observation: namely, that output growth is accompanied in the early stages of development by a widening wage differential between skilled and unskilled labour, whereas in a later stage this wage differential declines.