Urbanization and Income Inequality

Takahiro Akita

No EMS_2024_01, Working Papers from Research Institute, International University of Japan

Abstract: Using decomposable inequality measures, this study presents quantitatively the inverted U-shaped pattern of income inequality that emerges during a population shift from the low-income rural to the high-income urban sector (Kuznets process of urbanization). It investigates the effects of changes in the urban-rural income ratio and within-sector inequalities on the Kuznets process of urbanization. This study also examines urbanization and expenditure inequality in Indonesia using household-level data for 1996-2018. Our analysis reveals that if the urban-rural income ratio is relatively small while the urban-rural difference in income inequality is relatively large, then overall income inequality is likely to increase for a longer period of time as urbanization proceeds. Conversely, if the urban-rural income ratio is relatively large while the urban-rural difference in income inequality is relatively small, then overall income inequality is likely to peak at earlier stages of urbanization. Our analysis also reveals that the contribution of urban inequality to overall income inequality tends to increase as urbanization proceeds, though there may be some fluctuations due to changes in within- and between-sector inequalities. In Indonesia, the share of urban households has risen gradually from 36% to 55%. However, no systematic relationship is observed between the share of urban households and overall expenditure inequality, meaning that Indonesia fs household-level data does not support the Kuznets inverted-U hypothesis. However, Indonesia fs household-level data shows that urbanization has been associated with a rising contribution of urban inequality and a declining contribution of between-sector inequality.

Keywords: urbanization; income inequality; Kuznets process of urbanization; decomposition of the Theil indices; household survey; Indonesia (search for similar items in EconPapers)
Pages: 31 pages
Date: 2024-03
New Economics Papers: this item is included in nep-sea and nep-ure
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