The structure of income inequality in Puerto Rico

Abstract

The Kuznets hypothesis predicts that the level of income inequality will rise, then fall during the course of economic development. However, empirical studies have found that for many countries inequality levels off after a certain stage of development and remains at this level for a long period of time. In this paper, one possible reason for the formation of such an ‘inequality plateau’ is suggested. Puerto Rico is used for our case study. Employing an augmented input-output model, we find that the 1963 Puerto Rican economy had reached such an inequality plateau, with a very narrow range of inequality levels permitted by its economic structure. We then investigate the relation between the inequality band and the degree of sectoral interdependence. We find that under certain assumptions one can show a direct correspondence between the two, with the equality range narrowing as the linkages increase. Once an economic system has reached a certain degree of sophistication in its linkage structure its inequality level may become immobile. The implication of this is that after a point the natural course of development will not result in further reduction in inequality. At this stage, the government might have to intervene directly in income determination to reduce inequality.