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 early in development investment opportunities for those who have money multiply, while wages are held down by an influx of cheap rural labor to the cities. Whereas in mature economies, human capital accrual, or an estimate of cost that has been incurred but not yet paid, takes the place of physical capital accrual as the main source of growth; and inequality slows growth by lowering education levels because poor people lack finance for their education in imperfect credit markets.
The Kuznets curve implies that as a nation undergoes industrialization – and especially the mechanization of agriculture – the centre of the nation’s economy will shift to the cities. As capitalism causes a significant rural-urban inequality gap (the owners of firms would be profiting, while labourers from lagging industries and agriculture production would be losing income), rural populations are expected to decrease as urban populations increase, due to people migrating to cities in search of income. Inequality is then expected to decrease when a certain level of average income is reached and the processes of industrialization – democratization and the rise of the welfare state – allow for the trickle-down of the benefits from rapid growth, and increase the per capita income. This was Kuznets’ belief; that inequality would follow an inverted “U” shape as it rises and then falls again with the increase of income per capita.
Kuznets curve diagrams show an inverted U curve, although variables along the axes are often mixed and matched, with inequality or the Gini coefficient on the Y axis and economic development, time or per capita incomes on the X axis.
Since 1991, Environmental Kuznets Curves (EKC) have become standard features in the technical literature of environmental policy, though their application here is strongly contested.
Read more about Kuznets Curve: Kuznets Ratio, Criticisms, Applying The Kuznets Curve To Trade Liberalization, Environmental Kuznets Curves
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