Inequality and development

The Kuznets curve

Inequality of income and wealth tends to increase as economies begin to develop, indicating a potential conflict between economic development as an objective, and reducing levels of inequality.

However, widening inequality appears to occur at its most rapid rate in the early stages of development - indeed, beyond a theoretical maximum point inequality will begin to fall as the income and wealth gap between households starts to close.

According to the Kuznets curve, after American economist, Simon Kuznets, inequality in an economy will increase as it raises its level of development, say from a to b in the graph.

At early stages of development

The Kuznets curve

At ‘very low’ levels of development, the majority of the population have little income, and inequality is relatively low. Production tends to be based on primary goods, with agriculture dominating.

As an economy develops, a few can gain high rewards, widening the income gap. This seems to be a function of the early development of market systems.

As markets develop opportunities arise for those with capital or who can provide entrepreneurship. Rapid gains in income are possible for this group. However, at the other end of the spectrum, wages are suppressed as a result of an influx of cheap labour.

The application of capital appears important in the early stages of development, and the beneficiaries of wider use of capital are those who own capital, and the most skilled types of labour - those who can benefit most from new technologies. In a sense, the unskilled are 'left behind' in the early stages of development, and the gap between capital owners and the unskilled widens.

There is little 'trickle-down' of income and wealth to those who are not able to benefit from increased industrialisation.


As development progresses

However, with further development a ‘middle class’ of 'professionals' begins to emerge and labour becomes more skillful, and able to work with new technologies. The result is that inequality falls (from its peak at c to d). Higher incomes also means more tax can be collected, and the public sector begins to grow - with more spent on public and merit goods, and on social welfare.

Education becomes more evenly distributed and knowledge spreads across all sectors of the economy. Employment opportunities increase, increased labour market participation occurs, wages rise, skills develop, and new technologies provide opportunities for the better educated. As a result, inequalities begin to diminish.

video on the Kuznets curve

Laffer curve

What does the Laffer curve show?.

Laffer curve
Supply-side policy

How effective is supply-side policy?

Fiscal policy
Monetary policy

How effective is supply-side policy?

Supply-side policy

facebook link logo twitter link logo email link logo whatsapp link logo gmail link logo google classroom link logo