Employment transitions and the cycle of income inequality in postindustrial societies

Abstract

This article presents the claim that the current transition from service to knowledge employment impacts income inequality in a manner that is comparable to the previous transition from agriculture to industry. This contention is tested by an employment transition index that calculates the difference of employment between the higher- and lower-paid sectors of the economy. The calculation of this index is consistent with Kuznets’s view that income inequality increases during the early stages of industrialization due to the presence of a small and higher-wage modern sector that encroaches on the total numbers employed in the large and lower-wage traditional sector. However, income inequality eventually declines with continued industrialization as more workers enter the modern sector of the economy. Results confirm the central argument of this study for a panel of 25 Organisation for Economic Co-operation and Development countries from 1980 to 2008. According to the findings, classical Kuznetsian variables such as sector-dualism are not significant and/or signed in unanticipated directions in their prediction of income inequality. Instead, the employment transition index returns robust negative associations with income inequality and consistently outperforms sector-dualism. Furthermore, knowledge employment returns positive and significant connections with the dependent variable net of the employment transition index. These results confirm that both between- and within-sector employment patterns are key determinants of income inequality.