Kuznets Curve

Presented by- Tania Goel

MBA(1B)

A Kuznets curve is the graphical

representation of Simon Kuznets'

hypothesis that as a country

develops, there is a natural cycle

of economic inequality driven by

market forces which at first

increases inequality, and then

decreases it after a certain

average income is attained.

An example of why this happens is that earlyin development investment opportunities forthose who have money multiply, while wagesare held down by an influx of cheap rurallabor to the cities. Whereas in matureeconomies, human capital accrual, or anestimate of cost that has been incurred butnot yet paid, takes the place of physicalcapital accrual as the main source of growth;and inequality slows growth by loweringeducation levels because poor people lackfinance for their education in imperfect creditmarkets.

•The Kuznets curve implies that as a nationundergoes industrialization – and especiallythe mechanization of agriculture – the centerof the nation’s economy will shift to thecities. As capitalism causes a significant rural-urban inequality gap (the owners of firmswould be profiting, while labourers fromlagging industries and agriculture productionwould be losing income), rural populationsare expected to decrease as urbanpopulations increase, due to people migratingto cities in search of income.

• Inequality is then expected to decreasewhen a certain level of average income isreached and the processes of industrialization– democratization and the rise of the welfarestate – allow for the trickle-down of thebenefits from rapid growth, and increase theper capita income. This was Kuznets’ belief;that inequality would follow an inverted “U”shape as it rises and then falls again with theincrease of income per capita.

Kuznets curvediagrams show aninverted U curve,although variablesalong the axes areoften mixed andmatched, withinequality on theY axis andeconomicdevelopment,time or per capitaincomes on the Xaxis

•The Kuznets ratio is a measurement of theratio of income going to the highest-earning households (usually defined by theupper 20%) and the income going to thelowest-earning households,which iscommonly measured by either the lowest20% or lowest 40% of income. Comparing20% to 20%, perfect equality is expressedas 1; 20% to 40% changes this value to 0.5.

•Kuznets had two similar explanations forthis historical phenomenon:1.) Workers migrated from agriculture toindustry; and.2.) Rural workers moved to urban jobs.

In both explanations, inequality willdecrease after 50% of the shift forceswitches over to the higher paying sector.

Thank You !