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Kuznets curve

    Image:Kuznets.jpg|right Kuznets curve is the graphical representation of Simon Kuznets's theory ('Kuznets hypothesis') that economic inequality increases over time then at a critical point begins to decrease
    One theory as to why this happens in early stages of development when investment in physical capital is the main mechanism of economic growth inequality encourages growth by allocating resources towards those who save and invest the most 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 standards because poor people lack finance for their education in imperfect credit markets Kuznets curve diagrams show an inverted U curve although variables along the axes are often mixed and matched with inequality or the Gini coefficent on the Y axis and economic development time or per capita incomes on the X axis
    Kuznets had two similar explanations for this historical phenomenon:
    • workers migrated from agriculture to industry
    • rural workers moved to urban jobs
    In both explanations inequality will decrease after 50% of the work force switches over to the higher paying sector Economic historians have since used skill gap theories and the theories of capital concentration in early economies from classical economists and Marxists to further explain the Kuznets curve

    Criticism of Kuznets Curve

    Kuznets' conclusion that inequality must increase before decreasing however rests on shaky ground because he used cross-sectional data of many countries during the same time period rather than time series data that showed the progression of individual countries' development The U-shape in the curve comes not from progression in the development of individual countries but rather from historical differences between countries In his data set many of the middle income countries were in Latin America a region with historically high levels of inequality When controlling for this variable the U-shape of the curve tends to disappear

    Environmental Kuznets Curve

    Another situation where Kuznets type curves appear is the environment It is claimed that many environmental health indicators such as water and air pollution show the inverted U-shape: in the beginning of economic development little weight is given to environmental concerns raising pollution along with industrialization After a threshold when basic physical needs are met interest in a clean environment rises reversing the trend Now society has the funds as well as willingness to spend to reduce pollution This relation holds most clearly true for a few pollutants such as Sulfur Dioxide and Nitrogen Oxide but there is little evidence that the relationship holds true for other pollutants especially those with non-local effects or for the environment in general
    For example energy land and resource use (sometimes called the "ecological footprint") do not fall with rising income While the ratio of energy per real GDP has fallen total energy use is still rising in most developed countries In general Kuznets curves have been found for some environmental health concerns (such as air pollution) but not for others (such as landfills) However it is important to note that this does not invalidate the theory - the scale of the Kuznets curves differ for different environmental impacts We may still be on the 'upward' leg of energy use Kuznets curve and have to get even richer still before we see a decline


    • Grossman GM and Krueger AB (1993) Environmental Impacts of a North American Free Trade Agreement In "The Mexico-US free trade agreement" P. Garber ed. Cambridge : MIT Press

    • Harbaugh Bill Arik Levinson and Dave Wilson (2002) "Reexamining the Empirical Evidence for an Environmental Kuznets Curve" Review of Economics and Statistics 84(3) August 2002

    • Van Zanden JL (1995) Tracing the Beginning of the Kuznets Curve: Western Europe during the Early Modern Period The Economic History Review 48 (4) 643-664