An appropriate test of the Kuznets hypothesis

The Kuznets hypothesis, that is, inequality first rises and then falls as the economy advances, is often tested by regressing inequality on income and its squared term (along with other determinants). Findings of a significantly negative coefficient on income and a significantly positive estimate on the quadratic term are commonly taken as evidence supporting the inverted-U Kuznets curve. Although intuitive, Lind and Mehlum (2010 Lind, J. T. and Mehlum, H. 2010. With or without U? The appropriate test for a U-shaped relationship. Oxford Bulletin of Economics and Statistics, 72: 109–18. [Crossref], [Web of Science ®] , [Google Scholar]) argued that the conventional approach is flawed and proposed an appropriate test for a U-shaped association. We revisit the validity of the Kuznets hypothesis by applying the novel testing strategy of Lind and Mehlum (2010 Lind, J. T. and Mehlum, H. 2010. With or without U? The appropriate test for a U-shaped relationship. Oxford Bulletin of Economics and Statistics, 72: 109–18. [Crossref], [Web of Science ®] , [Google Scholar]) to annual US data over the period 1917 to 2007. Inconsistent with the Kuznets hypothesis, the test results overwhelmingly reject the combined null hypothesis of an inverted-U or monotone relationship in favour of a U-shaped linkage between income inequality and economic development. Moreover, the results are robust to changes in inequality measures and functional specifications.