Draft coming soon.
Abstract: This paper provides evidence for direct effects of inequality on structural transformation through a luxury/necessity channel and marketization of home production due to an opportunity cost mechanism. To assess the importance of these mechanisms in addition to the reverse effects of structural change on inequality, I build a model with heterogeneous production intensities, nonhomothetic CES preferences over sectors, and consumption as a composite of market and home origin within a sector. Combining estimated demand parameters from household level data with calibrated technology parameters, the quantitative model delivers three main results: (i) direct effects of inequality account for 3.7 pp (46%) of the increase in the high-skill services share through the luxury mechanism. (ii) for low-skill services, the necessity channel dominates the marketization mechanism, causing direct effects of inequality to lower the share by 0.7 pp (-106%). (iii) there are amplifying interaction effects between structural change and inequality. Further, investigating real-world changes in inequality, I find that the slowdown in inequality since the early 2000s lowered the high-skill services share by 23%, whereas the decline in tax progressivity raised the high-skill services share (by up to 0.5 pp) and lowered the low-skill services share (by up to 0.3 pp).
Draft coming soon.
Abstract: It is unclear whether the documented relationships between inequality and structural transformation in rich countries also apply to middle and low-income economies. This paper addresses this question by examining Tanzania and Mexico.