The impact of income distribution on structural transformation: The role of extensive margin

Yue Liu

Economic Modelling, 2017, vol. 64, issue C, 357-364

Abstract: I study the impact of income distribution on structural transformation. Empirical results suggest that income inequality induces lower share of employment in services sector, and this negative effect gets stronger as income level rises. To explain these facts, I present a multi-sector model with non-homothetic preference and heterogenous agents in terms of different income levels. In equilibrium, the individuals will not consume all the goods available in the market. While the income elasticity falls as income increases at the individual level, it may not at the aggregate level. The extensive margin of consumers is important to understand this result. Within this framework, I show that income inequality may have negative effects on an industry with income elasticity larger than 1. More importantly, this effect is getting stronger as income levels increase.

Keywords: Income distribution; Structural transformation; Income elasticity; Pareto distribution; Extensive margin (search for similar items in EconPapers)
JEL-codes: O11 O15 O41 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:357-364

DOI: 10.1016/j.econmod.2017.04.005

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