Kuznets 1955 suggested that income inequality was generally rising in the early stages of economic development. In the early stages of economic growth, pollution emissions increase and environmental quality declines, but beyond some level of income per. The possible combinations of income inequality and economic growth can be placed into a twobytwo matrix, shown in figure 2. In a seminal paper, kuznets 1955 argued that as countries developed, income inequality. There, fast economic growth was accompanied by a massive increase in income inequality. He finds that income inequality will limit the economic growth rates, given certain amounts of political power and expropriation benabou 1996.
O4, i3 a substantial literature analyzes the effects of income inequality on macroeconomic performance, as re. Does inequality in the distribution of income increase or decrease in the course of a countrys economic growth. The middleincome countries used in the data set are used as evidence for this claim as kuznets primarily used countries in latin america, which have had histories of high levels of economic inequality as compared to their counterparts in terms of similar economic development. Kuznets combined data from other sources and calculated the share of total personal income earned by top income groups and computed this for the whole period year by year result. A book edited by cornia 2004 made a significant contribution to the income distribution literature.
Income inequality and economic growth sciencedirect. Its purpose is to observe the impact of income inequality on economic growth in nigeria, examine whether kuznets curve holds and suggest probable and effective policy measures based on the. This effect diminishes as per capita gdp rises and may be positive for the richest countries. One of the major stylized facts about longrun processes of economic development is the kuznets curvethe inverseu shaped pattern of inequality. In 1980, the per capita income of the 15 richest nations was 44 times that of the 15 poorest, by 2000, that multiple had increased to 62. The kuznets curve and inequality economics johns hopkins. These estimations of historical income inequality indicate that the gini was around 51, 52 for the uk in 1801.
In light of this, it argues for a range of policies that would increase both equity and economic wellbeing. At the 67th annual meeting of the american economic association in 1954, simon kuznets delivered the presidential address, economic growth and income inequality. The starting point for the theoretical literature on the relationship between growth and income inequality is the kuznets hypothesis. For example, benabou 1996 reversed the dependent and independent variables used in kuznets hypothesis, thereby testing the effect that inequality has on economic growth. The relationship between income inequality and economic growth can be examined from the results of fig. The environmental kuznets curve ekc is a hypothesized relationship between various indicators of environmental degradation and income per capita.
In a neoclassical growth framework with a typical politicaleconomy mechanism, this paper reexamines the relationship between the income inequality and economic growth by introducing government spending into the production function and the utility function. The claim that inequality is as political as it is economic is hardly new, of course. Ruralurban inequality and economic development the relationship between income distribution and economic development was first identified by the seminal work of kuznets 1955. The kuznets ratio is a measurement of the ratio of income going to the highestearning households usually defined by the upper 20% and the income going to the lowestearning households, which is commonly measured by either the lowest 20% or lowest 40% of income. His work hypothesised an inverted ushaped relationship between income and inequality. Income inequality and economic growththe kuznets curve. Request pdf economic growth and income inequality in the period just after the second world war, italy experienced an increase in labour productivity bigger than the increase in real wages. Michael kotrous creighton university class of 2015. Quantitative aspects of the economic growth of nations. Distribution of income by size simon kuznets harvard university i. This paper provides new evidence on the relationship between economic growth and income inequality. Pdf the impact of income inequality on economic growth. Comparing 20% to 20%, perfect equality is expressed as 1. Thus growth impacts on income inequality and environmental.
The nobel laureate simon kuznets was a pioneer in the study of income inequality, writing in 1955. New international panel data with the first internally consistent time series for a large number of countries shows no evidence of a kuznets curve. Kuznets 1955 explored the historical evolution of income distribution and per capita output. The concept of propoor growth is introduced thereafter and defined as growth which raises the income relatively more for the poor than the betteroff groups, i.
Economic growth and income inequality simon kuznets the. This is suggestive that povertyreduction policies might be more useful for promoting growth than simply redistributing incomes. A rational theory of income inequality and the size of. The only currently existing hypothesis was formulated by kuznets 1955. Economic growth, financial development, and income inequality 15 in columns 79, when the stock market capitalization to gdp ratio is used as the proxy for financial development, there is no evidence of the ushaped effect.
Kuznets hypothesis of income inequality income inequality and the level of economic development has a shape of u. Section 2 trends in growth and income inequality across the oecd countries. In contrast to the kuznets hypothesis, there is evidence of a strong ucurve relationship between the top income shares and per capita income. However in 2009, reflecting better economic performance in several developing and transition countries. Inequality, growth, kuznets curve, gini coefficient. The data covers the period between 1870 and 2011 for 26 countries. However, over time, such data began to emerge, and the opportunities to test kuznets findings became greater. The relationship between economic growth and income.
Kuznets 1955, 1963, for example, famously advanced the hypothesis that income inequality rst rises then falls over the course of economic development. Economic growth, income inequality and environment. The kuznets curve and inequality adam smith institute. Thus the relationship between income distribution and income level can be described by an inverted ucurve. The kuznets inverted ucurve hypothesis that posits the relationship. Analyzing the relationship between income inequality and. Much of this analysis is empirical, using data on the performance of a broad group of countries. In the early stages of economic development, inequality increases.
Russia, on the contrary, became very quickly an unequal country soon after the fall of the soviet union. Economic growth rising inequality and rapid growth. Current day income inequality in the uk is again around 51, 52 as measured by. Economic growth, broadly categorized as high or low growth, is placed on the vertical axis, while levels of income inequality, broadly categorized as high or low income inequality, rest on the horizontal axis. While most of the literature has not made an explicit distinction between the shortrun and long run e ects of inequality on growth, the ndings in this paper show that they might di er signi cantly. His study demonstrated that income inequality widens in the early phase of economic growth and narrows in the later stage of development. Viii, distribution of income by size, economic development and cultural change, 11,2, 180. The kuznets curve, formulated by simon kuznets in the mids, argues that in preindustrial societies, almost everybody is equally poor so inequality is low. Income inequality and economic development in latin. Unemployment rate and educational attainment statistically significantly and positively. In his analysis, he theorized how an interindustry shift to the service sector will have an impact on earning inequalities, although such an impact is almost irrelevant to the entire populations income distribution kuznets, 1955.
A fundamental issue facing the global economy is the widening poverty gap between the developed and less developed world, and the widening distribution of income within countries and geographical regions. What is the effect of economic growth and development on income inequality within countries. Kuznets 1955 argued that as countries developed, income inequality first. Economic growth and income inequality simon kuznets the paper by kuznets can be found here. It implies that in each country group income inequality declines and then increases with the rise of gdp per capita following a quadratic trend. Economic growth and income inequality 5 even for what they are assumed to represent, let alone as approximations to shares in distributions by secular income levels, the data are such that differences of two or three percentage points cannot be assigned significance. The great rise of inequality let us start by examining the ongoing trends in income and wealth. Summary data from developing economies indicate that the earlier phases of economic development tend to be characterized by increasing income inequality, as those engaged in the small but growing modern sector of the economy pull away from those still left in agriculture and other subsistence activities. Studies of income inequality and economic growth have been well conducted by many other scholars and organizations. He suggested that as per capita income increases, income inequality also increases at first but then, after some turning point, starts declining kuznets 1955, 2324. The kuznets hypothesis suggests that inequality is low at a lower income level but later increases at higher income level with economic growth. Impact of inequality on economic growth in this context, person and tabellini 1994 conducted a study on the relationship between inequality and growth in the case of 56 countries, nine of which are developed during the postwar period. This paper is perhaps 4 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking.
Economic growth and income inequality 3 groups that, judged by their secular levels, migrate upward or downward on the income scale. Financial development, growth, and the distribution of income. Kuznets offered the hypothesis tentatively and with many qualifications. Even if we had data to approximate the income structure just outlined, the broad question posed at the starthow income inequality changes in the process of a countrys economic growthcould be. Problems of definition and measurement in this paper we deal with the relation between economic growth and the distribution of income by size among the individuals and households in a country. We define economy i and economy ii as the economy with high progressive tax and low progressive tax. The key problem facing researchers who studied the correlation between income inequality and economic growth in the years following the publication of kuznets paper was the lack of data on developing countries.
Since kuznets, an abundance of theoretical models have been advanced. Financial development, growth, and the distribution of income jeremy greenwood federal reserve bank of minneapolis and university of western ontario boyan jovanovic new york university a paradigm is presented in which both the extent of financial inter mediation and the rate of economic growth are endogenously deter mined. It seems that most indicators of environmental degradation are monotonically rising in income though the income elasticity is less than one and is not a simple function of courge alone. Initially, it experience a period of economic stagnation during the 1990s, although it was partially reversed in the following decade, when russia. Although there has been a great deal of empirical research on this topic since kuznets 1955, the question has been difficult to answer due to lack of good quality international data on income inequality. As the process of growth begins, income inequality increases. Income inequality and economic growth international. This finding implies that income inequality measured by a ratio of the.
Economic growth, financial development, and income inequality. Inefficiency and the misallocation of labor have direct consequences on the income distribution as the growth effect of structural change varies across countries within asia, from more than 50% in viet nam to about 11% in the prc. Reducing income inequality by economics growth in georgia. Simon kuznets predicted that as an economy develops inequality will rise and then, at a certain stage of development naturally begin to fall back again it would seem that he was reasonably correct as well. As growth proceeds, the spread of the distribution slows, stops and, finally, reverses in the late stages of development.
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