In economics, a Kuznets curve graphs the hypothesis that as an economy develops, market forces first increase and then decrease economic inequality. The hypothesis was first advanced by economist Simon Kuznets in the 1950s and ’60s.
One explanation of such a progression suggests that early in development investment opportunities for those who have money multiply, while an influx of cheap rural labor to the cities holds down wages. 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 center of the nation’s economy will shift to the cities. As internal migration by farmers looking for better-paying jobs in urban hubs causes a significant rural-urban inequality gap (the owners of firms would be profiting, while laborers from those industries would see their incomes rise at a much slower rate and agricultural workers would possibly see their incomes decrease), rural populations decrease as urban populations increase. 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. Kuznets believed 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.