Economic development, urban underemployment, and income inequality
The evolution of income inequality during the course of economic development is investigated. The source of inequality is market luck in obtaining employment in the protected urban 'formal sector' versus employment in the unprotected urban 'informal sector. It is shown that with development, inequality tends to follow an 'inverted u. It rises when urbanization is low and consequent pressure on the land keeps rural incomes low, making agents willing to incur high risks of 'underemployment' in the urban informal sector. It eventually falls after urbanization and consequently rural incomes have increased sufficiently to allow agents to make better than even bets in the urban industrial sector.