ECONOMIC-DEVELOPMENT, URBAN UNDEREMPLOYMENT, AND INCOME INEQUALITY

The evolution of income inequality during the course of economic devel opment is investigated. The source of inequality is market luck in obt aining employment in the protected urban 'formal sector' versus employ ment in the unprotected urban 'informal sector.' It is shown that with development, inequality tends to follow an 'inverted U.' It rises whe n urbanization is low and consequent pressure on the land keeps rural incomes low, making agents willing to incur high risks of 'underemploy ment' in the urban informal sector. It eventually falls after urbaniza tion and consequently rural incomes have increased sufficiently to all ow agents to make better than even bets in the urban-industrial sector .