Income inequality in the U.S.: The Kuznets hypothesis revisited

Using annual data from 1919 to 2002, the structural transformation hypothesis proposed by Simon Kuznets helps explain the U-shape of U.S. top 1% or 0.01% income share distributions. Flexible autoregressive lag representations are employed and generalized methods of moments reinforce our results. First, as the employment share in goods producing activities falls, income inequality increases in the long run. Second, federal top taxation has only shortterm negative impacts. Third, these major results hold to business cycle controls (linear time trend and real output fluctuations) and to robustness checks of structural changes documented for the U.S. economy around the late 1970s.

► Using U.S. annual data from 1919 to 2002, the structural transformation hypothesis proposed by Simon Kuznets helps explain top income shares in the long-run. ► We find that as the employment share in goods producing activities falls, income inequality increases in the long run. ► Federal top taxation has only short-term negative impacts.