Income Inequality in Developing Countries

7 • Globally, it is reported that the top 1 percent of income recipients receive about 15 percent of worldwide income, and the top 5 percent receive 40 percent of all income. Meanwhile, the poorest 20 percent receive only 1 percent of the global income. This paper attempts to unlock the significant factors that affect income inequality. In 1963, Simon Kuznets derived the inverted U hypothesis from which he inferred that through the course of development, as per capita income increases, initially, income inequality will increase before it starts to improve. Hence he inferred that the trend of income inequality through a country's development takes the form of an inverted U. However, Kuznets' inverted U is a development pattern and not a theory. Therefore, the inverted U pattern does not explain income inequality. In this study, using data on 61 countries, an inverted u pattern is found. The labor surplus model supports that the share of labor in industry and high population growth rates explain the inverted U. An explanation given by Arthur Lewis also supports that education explains the inverted U pattern. Using empirical tests, this paper addresses whether the share of labor, high population growth rates and education determine the inverted U pattern that was also found using data in this study.